In addition to hoarding Bitcoin, how do institutions quietly make money in the bull market?

In fact, it is not just in 2020. Every round of sharp rise in Bitcoin prices is accompanied by the entry of institutions.

When Bitcoin broke through $1,000 for the first time at the end of 2013, Silicon Valley venture capital circles began to "enter the market" in a high-profile manner. For example, the co-founder of Union Square Ventures, a well-known Internet investment institution, was the first to put forward the bullish view that "Bitcoin will be as disruptive as the Internet, and investment will continue" at a hearing on Bitcoin regulatory policy held in New York in early 2014. When the price of Bitcoin broke through $19,000 in December 2017, the Chicago Mercantile Exchange (CME), the world's largest derivatives exchange, took the lead in launching compliant Bitcoin derivatives trading services.

It can be seen that the "institutionalization" of the digital currency industry is not only a feature of this round of bull market, but a long-term trend.

The difference is that the institutions that entered the market in the previous times were mainly from the venture capital industry, while this year's institutions are more diversified.

Financial and Internet giants are the two pioneering forces that accelerate the "institutionalization" of the digital currency industry. In 2017, different buyers gathered together, and this year, in addition to common institutional buyers, such as hedge funds and venture capital, there are more institutional sellers in the market, including mining services, mainstream mobile payment companies, Internet brokers, traditional market makers, etc. These platforms are trying to meet greater market demand.

The logic of the buyer's market is relatively simple, and investors buy and hold because they are optimistic about the development of the field. The seller's market, on the other hand, generates profits by providing related services and has a relatively mature business model.

The entry of institutions represents "service professionalization". MicroStrategy, a US business intelligence listed company that has been bullish on social media and has bought a large amount of Bitcoin, uses Coinbase's institutional sell-side trading service to buy Bitcoin at high frequency through splitting algorithms without being discovered by the market. MicroStrategy CEO Michael Saylor also claimed that he conducted as many as 78,388 off-chain transactions to buy 21,454 BTC. Coinbase's services helped MicroStrategy save millions of dollars in costs, and as the price of Bitcoin grew, MicroStrategy's initial trial was also very profitable.

From traditional financial institutions to Internet companies, the profit strategies of institutions do not rely solely on the unilateral rise of Bitcoin prices. Some institutions have never even held Bitcoin. For example, CME Globex, the world's largest derivatives exchange, currently manages futures contracts with a total open interest of nearly 1.4 billion US dollars. However, it has not held or managed a single real Bitcoin in the past three years. Instead, it makes profits by collecting US dollar fees from both buyers and sellers of the contract. The profit methods of various institutions have become more and more diversified, from simply waiting for the price of the currency to rise, and have a positive impact on the industry.

In addition to making profits from Bitcoin-related services, high-profile unilateral bullish bulls are not isolated cases. For example, mobile payment giant Square purchased about 4,700 Bitcoins this year, and business intelligence company MicroStrategy also purchased 70,000 Bitcoins in batches this year as a medium- and long-term company asset allocation, and disclosed it in the company's public financial report. CEOs have publicly expressed their optimism about its long-term development on social media. For example, the CEO of MicroStrategy once shared his Bitcoin investment experience with Elon Musk on Twitter.

In addition to long-term Bitcoin bulls, there are also some speculative trading institutions that have a great impact on the market.

According to Dovey Wan, founder of Prpitive Ventures, compliance institutions currently involved in the Bitcoin field are divided into three categories.

The first category belongs to speculative institutions, which tend to be short-term. Most institutions on Wall Street belong to this category, such as Ark Capital, which originated from a professional hedge fund. They now have a large trading volume. Whether it is futures arbitrage or professional quantitative trading, they are mainly attracted by the short-term price fluctuations and liquidity of Bitcoin and are purely trading-oriented.

The second category is investment institutions that earn money based on US dollars. Many Grayscale investors enter the Bitcoin world through its trust and then sell it during the profit cycle. They pay more attention to the investment returns based on fiat currency.

The third category is allocation institutions. Recently, as listed companies such as MicroStrategy consider Bitcoin as an asset allocation, it may affect listed companies with more cash reserves on their books to manage their strategic reserves. Because of the trend of low correlation between Bitcoin prices and US dollar assets, such allocation institutions will tend to hold Bitcoin for a long time.

According to data analysis platform Skew's research on Grayscale premium arbitrage, the price of Greyscale's Bitcoin Trust GBTC shares in the secondary market has long been at a large premium relative to the net asset price (NAV), with an average premium rate of 19% last year.

The Chicago Mercantile Exchange (CME), which is also open to compliant institutions, allows investors such as the Renaissance Quant Fund to use US dollars to go long or short Bitcoin futures contracts without owning Bitcoin spot. As the net short position of CME leveraged funds exceeded $460 million, Skew believes that hedge funds do not hold "naked short" Bitcoin positions, but are conducting "Grayscale premium" cash carry arbitrage.

The high premium of its Bitcoin derivatives attracts not only hedge funds, but also many traditional market makers such as Akuna and Jump Trading. Market makers provide liquidity for Bitcoin through algorithmic trading to obtain rebates from trading platforms. They do not predict the rise and fall of Bitcoin prices. The reason for their entry may be that they can get higher returns on digital currencies compared to traditional markets.

The major holders of GreyScale trust shares are BlockFi and Three Arrows Capital, which are respectively a digital currency lending platform and a hedge fund investment company focusing on the blockchain field. They are the most active lenders/borrowers in the market.

Grayscale seems to be able to use its trust premium to enable depositors and lenders of this size to obtain a high interest rate. SEC filing 13G shows that they are a large institutional holder of the trust with a share of more than 5%.

In December 2020, the field of digital currency once again frequently appeared on the front pages of mainstream media, and more "famous" well-known companies were added, just like the bull markets in 2014 and 2017. Among them are listed technology companies that have joined their asset allocation due to long-term optimism, and a considerable number of short-term and medium-term participants. Although the profit of participating institutions is not simply to buy Bitcoin and wait for the price to rise, from a long-term perspective, these participants are conducive to making this emerging ecosystem more vibrant.