Fidelity: Five Trends of Bitcoin in 2020

This article was published on Bitpush News, author: Ria Bhutoria, translated by: Amy Liu.

In 2020, Bitcoin thrived as a digital asset. Over the past twelve years, Bitcoin's visibility has continuously increased, and the infrastructure has matured. Fidelity Digital Assets, a subsidiary of asset management giant Fidelity, is building enterprise-level Bitcoin custody services for large institutions. In this report, we review five major trends that garnered significant attention in the Bitcoin space over the past year:

The macro backdrop creates a mature environment for Bitcoin adoption

The macro backdrop is one of the key factors driving Bitcoin demand today and is also an important factor in Bitcoin's inception as a scarce, decentralized asset. Below, we will discuss interest rate changes, unprecedented levels of quantitative easing, fiscal stimulus measures, and potential inflation, all of which are driving interest in Bitcoin.

The first response of central banks to the pandemic was to lower interest rates to zero, leading many investors to question the role of fixed-income securities in their portfolios. At the same time, yields on fixed-income securities are at historic lows, reducing the opportunity cost of investing in non-yielding assets like Bitcoin.

Moreover, with benchmark interest rates at zero, the minimum level of inflation implies negative real interest rates, further enhancing the appeal of non-yielding assets.

Central bank quantitative easing is reflected in the change in their total assets. The total assets of G3 central banks (European Central Bank, Federal Reserve, and Bank of Japan) increased by about 3% last year, a level of growth that took 8 years to achieve during the global financial crisis.

G3 Total Assets

History shows that it is difficult to unwind interventions even after emergency phases end. For example, although the Federal Reserve's total assets gradually shrank to about $3.8 trillion by mid-2019, it has never been able to reduce total assets to pre-global financial crisis levels.

In 2020, the role of central banks' expansionary monetary policies changed as they were also used to fund fiscal spending aimed at individuals and smaller businesses.

Additionally, the Federal Reserve announced a policy shift towards an average inflation target, meaning the central bank would allow inflation to fluctuate above average levels for a period of time.

We have seen aggressive interventions by central banks and governments in the economy, and the potential consequences of such interventions have led many investors to reassess how Bitcoin fits into their portfolios.

Supply constraints exacerbate Bitcoin scarcity

Bitcoin has become a scarce asset due to its fixed supply. This is completely inelastic, as an increase in demand does not translate into an increase in supply. Price is the only valve that changes demand. Bitcoin has a supply schedule and a supply cap of 21 million units. The supply schedule refers to the halving of block rewards every four years until the total number of Bitcoins in circulation reaches 21 million.

On-chain data provider Glassnode further analyzed Bitcoin's supply situation, categorizing it into "illiquid supply," "liquid supply," and "highly liquid supply" based on the behavior of entities.

According to Glassnode, illiquid supply can be interpreted as Bitcoin held by entities that are hoarding Bitcoin in anticipation of long-term price increases. As of early January 2021, the illiquid supply amounted to 14.6 million Bitcoins, accounting for 78% of the circulating supply. This represents an increase of over 1 million from the same time last year, with a growth rate of 8.5%.

Another indicator revealing participant behavior is the amount of Bitcoin on exchanges. When market participants plan to trade assets, they transfer funds to exchanges. When they plan to hold assets, they move funds from exchanges to longer-term, safer storage. In 2020, Bitcoin balances on exchanges decreased by 22%.

Bitcoin Illiquid Supply

Bitcoin market matures

In recent years, the Bitcoin market has significantly matured due to the growth of retail investors and institutional infrastructure providers. This has led to reduced volatility, tighter bid-ask spreads, and increasing institutional trading volumes.

Amid the panic over the pandemic, volatility in many asset classes surged to historic highs, with Bitcoin experiencing a historic spike in volatility last March. While Bitcoin's volatility relative to other assets remains very high, the volatility ratio of Bitcoin to the S&P 500 index and gold decreased in 2020.

One attractive feature of Bitcoin is its historical lack of correlation with other assets. For example, according to Coin Metrics, from January 2015 to December 2020, Bitcoin's average 60-day correlation with the S&P 500 index was 0.03, with gold it was 0.05, and with the Dollar Index (DXY) it was -0.06.

Spearman Correlation Coefficients for 2020

With clearer regulations from institutions like the OCC, we can see more traditional institutions participating in the construction of Bitcoin market infrastructure. This participation may help further improve market efficiency and liquidity, facilitating greater institutional adoption of Bitcoin.

Institutional adoption

Since early 2018, the industry has been advocating for institutional adoption. In 2018 and 2019, most institutions adopting Bitcoin were infrastructure providers, laying the groundwork for institutional investor participation that arrived in 2020.

Data from cash-settled Bitcoin futures on the CME provides evidence of institutional participation. Compared to the first half of the year, both trading volume and open interest in the second half saw significant growth, with trading volume doubling and open interest increasing nearly fivefold.

CME Bitcoin Futures

An important trend to watch is how the industry's institutional demand can be indirectly shown through public offerings by crypto companies in the coming years and to what extent these offerings can enhance the coverage of the underlying networks supported by these companies.

Retail interest—Bitcoin as a store of value for millennials

While institutional investors dominate, retail has always been an important area for Bitcoin, especially among millennials and Generation Z. Several surveys of younger generations show their openness to digital assets like Bitcoin. For example, a survey by deVere Group found that about 700 millennials indicated that Bitcoin is a better hedge asset than gold.

The adoption of Bitcoin by these young individuals is significant because this group is set to inherit $68 trillion in wealth over the next few years, marking the largest intergenerational wealth transfer. Many companies have begun to recognize the necessity of supporting digital assets like Bitcoin to effectively compete for these customers.

Among existing fintech companies, Square began supporting Bitcoin in 2018, followed by Robinhood and Sofi, and more recently, PayPal. PayPal has offered Bitcoin and other digital asset trading services to all U.S. customers and plans to expand globally this year.

Given the growth in retail demand, market maturation, and changes in regulatory leadership, the approval of Bitcoin ETFs is a topic of consideration for many industry insiders. At the same time, we will closely monitor traditional financial institutions that, driven by OCC regulations, facilitate retail investors' access to digital assets.

Conclusion

In the first quarter of 2020, Bitcoin, like all other asset classes, was affected by the pandemic. After the initial market turmoil, the market realized that Bitcoin would not be fundamentally disrupted by the pandemic. It rebounded without any intervention, ending the year with prices exceeding the historic highs set in 2017-2018.

The increasingly unstable macro environment has driven interest and demand, leading retail investors and institutional allocators to reassess their portfolios. Many investors concluded that they should understand and analyze Bitcoin.

The maturation of institutional infrastructure has enabled the market to absorb record levels of demand and activity from investors. With positive developments in regulation, traditional institutions can support the digital asset industry, and we expect infrastructure to improve and further integrate with traditional asset classes, thereby lowering the barriers to participation.