By Yasin Ebrahim
Bitcoin’s fall from grace hasn’t quieted its supporters, who are confident the hunt for yield will land institutional investors at the popular cryptocurrency’s door as soon as fourth quarter.
“We’re looking at three volatile months, both up and down […] but I still think we’ll see $100,000 this year, probably in the fourth quarter,” Michael Venuto, chief investment officer for Toroso Investments, said in an interview with Investing.com.
This next big driver of demand that will ultimately revive the bull run for bitcoin won’t have anything to do with the popular cryptocurrency. In their hunt for yield, institutional investors will begin to seek out bitcoin and other cryptos.
Institutional investors are well versed in the hunt for yield, or the lack of it, especially in the bond market, where the low-rate environment has served up pitiful, and even negative returns.
But the big bet from institutional investors won’t be on the direction of bitcoin and other cryptos, but on the yield they can generate when loan out to borrowers.
“People are will start to realize they can stake their cryptocurrency Bitcoin, USDC or other cryptos and receive a 4% or 5% yield. You’re going to see a lot of money move out of traditional fixed income towards forms of cryptocurrency,” Venuto added.
While blockchain products can be complex and often served up with a steep learning curve that can put investors off, investing in yield earning products is easier and quicker for investors to grasp.
“I think that the yield story really is attracting new demand,” Cynthia Wu, head of Business Development at Matrixport, told Investing.com in an interview Wednesday.
“While investors might not really understand how high bitcoin price can go, for them it’s very clear and easy to understand the interest premium.”
Similar to the traditional banking business, investors can stake, or loan their cryptos like bitcoin or stablecoins like USDC, USDT, and receive yield or interest in return from borrowers.
The borrowers are typically institutions or retailers that have a need to borrow. A typical borrower profile would be crypto miners, who borrow the stablecoin to pay for their basic working capital or investments into mining equipment.
It is also common to find hedge fund, trading on leverage, who borrow cryptocurrency to trade.
“In order to borrow a stablecoin from platforms like ours [Matrixport], borrowers need to pledge collateral, for example, BTC or ETH with us, and at the same time they pay interest,” Wu said.
“This interest is [then] distributed to the investor [in the yield product].”
But there is a need to protect against the inevitable swings in the value of bitcoin and other cryptos.
This is often done through a margin-call like mechanism that requests the borrower to deposit more collateral when the loan to value rises above a certain threshold.
“[I]if we to lend out to other institutions, and take in bitcoin as collateral, the value will fluctuate because the price will fluctuate,” Wu added.
“If the loan to value rises to a certain percentage, then we issue margin call [requesting] the borrow to put up more margin. If they don’t, then there will be forced liquidation to ensure that investor principle is protected.”
But traditional investors aren’t only in bonds for the yield, but for the hedge, or diversification benefits that offer protection for their portfolios when uncertainty hits the stocks.
Bitcoin, however, has received a mixed reaction when the topic of diversification is broached, particularly at a time when it has lost nearly half its value since topping $60,000. But some are quick to remind investors to ditch the short-term investment goggles when judging bitcoin.
“The premise of diversification into bitcoin is that it is going to outperform [over the long-term relative to other asset classes],” said Brad Yasar, CEO and founder of EQIFI. “Bitcoin is an asset that has outperform all types of assets in the past 10 years.”