Will Fidelity satisfy the institutional bitcoin glut?

Despite the bear market that began eight months ago, there is one niche that never slowed down; bitcoin OTC (over the counter) trades, or block trades, as some prefer to call it.  Throughout this time, I have had institutional clients looking to buy anywhere from 100,000 btc up to 1,000,000 btc. The bitcoin price movement did not seem to have any impact on this glut.  There was a New York City private investment bank looking to buy 500,000 “to test the waters”, and a US-based family office looking for 1,000,000 btc “to get the things going” and a public bank looking for 1,000,000 btc asking to transact “outside the US”.  The buyers that I have personally interacted with generated enough demand to buy every single bitcoin ever mined.

Suffice to say, none of those deals went through …

As a broker in these transactions, you stand to make between 0.25 to 1 percent of the total amount, and if you do the math, one’s profits could be very significant.  So, if we have several parties that all want to do business and expect to make large profits by doing so, why do these transactions fall through? Although there is no official data about these transactions, I am confident that there has never been a transaction done north of 100,000 btc.

The part of the equation that I intentionally left out is sellers.  None of the sellers that were claiming to have a capacity to furnish these amounts of bitcoin actually had it.  Or at least none of them were willing to provide evidence in a way that would satisfy buyer’s concerns. Additionally, the talks tend to break down because the two sides cannot come to an agreement on the procedures.  

This part may seem trivial to an outsider, but it is not.

Let’s say we have a Party A that wants to sell 100,000 bitcoins and a Party B that wants to buy them. A Party A will not send their bitcoins until they receive a payment from B because, once they do send it, there is absolutely no way to reverse it.  On the other hand, Party B is also reluctant to send their share because they are afraid of getting defrauded. A buyer wants to see a POC (proof of coin; POC comes in different forms, a Satoshi, an attestation by the lawyer, a video etc.) before they provide a POF (proof of funds). And the seller does not want to send a POC because either he is afraid of getting hacked or because he doesn’t have the coins. 

The most common solution to this problem is an escrow agent. However, good old-fashioned escrow agents do not understand these type of transactions (as they don’t understand how bitcoin works.) I have had experiences interacting with these escrow agents only to discover, to my dismay, that they do not even have the most basic understanding of how to confirm a bitcoin transaction. They are also wary of the crypto space, and the new crop of crypto escrows lacks credibility.  And when established escrows move into this space, they typically don’t provide bitcoin escrow, they will only escrow the fiat.

Because of these difficulties, the  news that Fidelity Investments is getting into crypto business is huge.

Fidelity Launches Platform for Institutional Crypto Trading

According to CNBC, Fidelity will be “providing cryptocurrency and trade execution” for institutional investors.  If these plans come to fruition, it may imply that finally, the glut exhibited by institutional investors will be satisfied, at least partially — although it is still unlikely that we’ll see millions of bitcoins changing hands on a daily basis.  

This may not only lead to the bitcoin price rising short-term but could eventually change the long-run equilibrium by shifting the real bitcoin supply curve to the left as many of the institutional investors are looking to hold it long-term as “new gold”.  

 

 

The first chart is a regular bitcoin supply-demand representation (for the sake of simplicity, 21 million supply is assumed).  In the second chart, I introduce Real Supply which I define as total bitcoin supply minus the bitcoins that were lost and minus the bitcoins that are not liquid due to being held as a long-term investment.  Finally, the third chart represents the shift in equilibrium after the pent-up institutional demand is materialized. – The demand shifts to the right, but also real supply is shrunk as some of those institutional buyers are going to hold they newly acquired coins long-term.  As a result, the price of bitcoin increases.

The days when Central Banks from around the world will start adding bitcoins to their reserves may be not far away…

 

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