By Yasin Ebrahim
Bitcoin’s disgrace has not calmed its supporters, who believe the hunt for yield will bring institutional investors to the door of popular cryptocurrency as early as Q4.
“We are 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, ”said Michael Venuto, chief investment officer of Toroso Investments, in an interview with Investing.com.
This next big demand driver that will ultimately reignite the bitcoin bull run will have nothing to do with popular cryptocurrency. In their quest for yield, institutional investors will start looking for bitcoin and other cryptos.
Institutional investors are familiar with the hunt for yield, or the lack of it, particularly in the bond market, where the low interest rate environment has generated pitiful or even negative returns.
But the big bet for institutional investors will not be on the direction of bitcoin and other cryptos, but on the return they can generate when they lend to borrowers.
“People will start to realize that they can stake their Bitcoin, USDC, or other cryptocurrency and receive a 4% or 5% return. You’re going to see a lot of money shifting from traditional fixed income securities to forms of cryptocurrency, ”Venuto added.
While blockchain products can be complex and often come with a steep learning curve that can discourage investors, investing in products that generate returns is easier and faster for investors to grasp.
“I think the performance story is really attracting new demand,” Cynthia Wu, business development manager at Matrixport, told Investing.com in an interview on Wednesday.
“While investors may not really understand how high the price of bitcoin can get, for them it is very clear and easy to understand the interest premium. “
Similar to traditional banking business, investors can stake or lend their cryptos like bitcoin or stablecoins like USDC, USDT, and receive yield or interest in return from borrowers.
Borrowers are usually institutions or retailers who need to borrow. A typical borrower profile would be crypto miners, who borrow stablecoin to pay for their basic working capital or investments in mining equipment.
It is also common to find hedge funds, trading with leverage, that borrow cryptocurrency to trade.
“In order to borrow a stablecoin from platforms like ours [Matrixport], borrowers have 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 it is necessary to protect against the inevitable fluctuations in the value of bitcoin and other cryptos.
This is often done through a mechanism similar to a margin call that requires the borrower to deposit more collateral when the value of the loan exceeds a certain threshold.
“[I]if we lend to other institutions and accept bitcoin as collateral, the value will fluctuate because the price will fluctuate, ”Wu added.
“If the loan-to-value ratio reaches a certain percentage, we issue a margin call [requesting] borrowing to set up more margin. If they don’t, then there will be a forced liquidation to ensure that the principle of the investor is protected.
But traditional investors don’t just use bonds for yield, but for hedge or the diversification benefits that protect their portfolios when uncertainty hits stocks.
Bitcoin, however, has received a mixed reaction when the topic of diversification is brought up, particularly at a time when it has lost almost half of its value since surpassing $ 60,000. But some are quick to remind investors to ditch the short-term investment glasses when judging bitcoin.
“The premise of diversification in bitcoin is that it will outperform [over the long-term relative to other asset classes]Said Brad Yasar, CEO and Founder of EQIFI. “Bitcoin is an asset that has outperformed all types of assets over the past 10 years.”