21Shares: Bitcoin is a „Systematic Hedge Against Monetary Inflation And Geopolitical Instability“

Bitcoin suffered one of its worst crashes on Monday, but fought its way back to $36,000 on Tuesday morning. Even though small investors have recently jumped on the hype again, institutional investors are considered to be the main driving force behind the new bull run.

In 2020, 21Shares AG, based in Zug, Switzerland’s Crypto Valley, for example, ensured that investors can invest in Bitcoin and Ethereum on the Vienna Stock Exchange. In this interview, Lanre Ige, Research Team Associate at 21Shares, explains why BTC became attractive to institutional investors, the dangers of investing in crypto, and why BTC is considered digital gold.

Bitcoin has grown to more than $40,000. Institutional investors are considered to be the drivers of the development. So why are companies, like insurances, banks, funds, investing in Bitcoin?

Lanre Ige: These companies and other stakeholders are investing in Bitcoin because they are increasingly convinced by the thesis of Bitcoin as a sort of digital Gold. The combination of both macroeconomics factors such as the Coronavirus as well as microeconomic, Bitcoin-specific factors such as improved institutional-grade infrastructure, such as our ETPs and Futures, and large steps forward in regulation of the industry. Companies and investors see investing in Bitcoin as an alternative and complement to investing in Gold and as a systematic hedge against both monetary inflation and geopolitical instability as we’ve seen across the world in 2020.

21Shares has launched ETPs for Bitcoin and Ethereum on the Vienna Stock Exchange in 2020. These ETPs are also available on other exchanges in German-speaking countries. How is the offering being received?

Especially over the last year we’ve seen solid of interest in both our Bitcoin and Ethereum ETPs. Institutional and professional investors have become increasingly keen on the potential of cryptoasset, especially in response to the events of the last year. We expect to continue to see a lot of growth for our products in Germany, Italy, Switzerland, and Austria in the coming years.

21Shares is partnering with Coinbase on the ETPs. Huge amounts of BTC are purchased there on a regular basis. Can there be shortages in the supply of BTC?

We’ve seen Coinbase exhibit a noticeably ($100s) premium for Bitcoin compared to other popular exchanges such as Bitcoin. This has often been at the start of large rallies of the price of Bitcoin — for example the one which saw it increase past $20,000. Given that sizeable trades of some of the leading corporates and institutional investors such as Microstrategy and One River Digital were facilitated by Coinbase, it is likely that these surges on the exchanges were Coinbase executing the bids of some of these large players.

Any shortage of Bitcoin supply on a given exchange is met with a change (increase) in the clearing price of Bitcoin. We have seen this to very large extents over the last month or so.

Michael Saylor, the CEO of MicroStrategy, has become a preacher of Bitcoin. He believes that investing would be a hedge against impending inflation. Do you see it that way as well?

The possibility of increasing inflation in the coming years is very real, especially given the increased openness of central banks and governments around the world to inflating their currencies during times of need. Bitcoin, given its fixed supply of 21 million, acts as an obvious contrast to it and we do see a lot of investors investing in the asset as a hedge against inflation.

The reasoning is easy and simple to understand, someone that own 1% of all 21 million Bitcoin will always hold that much as long as they do not sell. This is not the same for most other assets and strengthens Bitcoin’s key property as a possible inflation hedge.

Bitcoin is often referred to as digital gold. What advantages does Bitcoin have over physical gold?

Bitcoin’s key advantages over physical gold include its transparent nature, its audibility, its ease of transport or digital nature, and the immutability of its transactions. This is an important point to note as, in recent weeks, Gold ETF outflows have correlated with inflows into Bitcoin and Bitcoin-related products.

The BTC Halving in 2020 has reduced the amount of new coins coming into the market. At the same time, the absolute amount of Bitcoins is limited to 21 million. Will this artificial scarcity drive the price further?

We don’t view the halving as an example of „artificial scarcity“ but rather an elegant way to ensure that Bitcoin has a fixed supply. The halving itself acts as a notable event that reminds people of Bitcoin’s unique property and the fixed supply is what allows Bitcoin to fulfil its role as a digital Gold. Without this property, it would have not seen as much capital inflows as it has in the coming months.

21Shares also lets you invest in Ethereum. With Bitcoin already very expensive, will this become the second choice for institutional investors?

Ethereum presents a strong counterweight to Bitcoin given the fact that it has a unique investment thesis — acting a digital office for an internet-based finance economy — and the fact that institutional adoption has been less for the asset to date. Our Ethereum ETP is a second-most-popular single-tracker ETP and investors are increasingly convinced by its usefulness and its investment thesis.

When we look at numbers such as active addresses, fees paid on its blockchain, or applications built on top of Ethereum, we see that the asset is a leader within the market which explains its adoption among crypto-insiders and retail investors. We expect this to continue to spill over into institutional investors as more learn about products such as ours.

Bitcoin is still a speculative asset. In 2021, PayPal wants to allow people to pay with crypto in online stores. Can this become a reality, given the still high volatility?

We expect Bitcoin payments to remain an aspect of the market but likely to be out shadowed by its investment use case and its use for payments within censorship-heavy environments — where the volatility does not matter. However, giving users and businesses more options is always better.

Speaking of volatility – how dangerous are investments in Bitcoin? Could the market crash again as much as it did in 2018?

Bitcoin will continue to exhibit noticeable amounts of volatility to what we’ve seen in the past and it’s impossible to predict whether it will crash in a similar way to 2018. What can be said for certain is that the reasons for this bull market are much more driven by the asset’s long term fundamentals than ever before and the marginal buyer of Bitcoin, in this case institutional and professional investors, have much longer time horizons than the investors who dominated Bitcoin bidding in 2017.

The market may eventually consolidate — more likely due to macroeconomic factors — but likely at a much higher level as a result of the increased adoption of the asset. There has been a clear evolution of the way investors see Bitcoin and the investment narrative surrounding the asset and it’s likely that this will continue even as market fervour relaxes.

21Shares was founded in 2018 as a crypto asset manager. Are you also thinking about expanding into other businesses? You could launch an exchange yourself, issue a token, offer blockchain software, or become a broker for large clients.

Our business model has been based on making crypto investments as easy as possible. We are more a tech firm than a righteous asset manager, though our expertise is in both. As our technology helps us drive the simplicity of investing into crypto assets via our regulated products on the stock exchanges, we continue to innovate with product that will gain traction with institutional investors.

We want to continue that we set out 3 years ago by innovating the industry so that investors can capture this novel yet nascent assets class, just like it was possible to invest easily into Gold back in 2006/7 via an ETF. Our mandate is clear and we do not want to be too distracted with other projects is this is the core of our business. Our expansion into Europe takes huge amount of resources and making sure we get it right takes a lot of resources.