*cue Baba O'Riley*
*record scratch*
*freeze frame*
V.O. "Yup, that's me. You're probably wondering how I ended up in this situation...."
"Well, like any good story this one begins with a woman."
In this case, Izabella Kaminska, editor of the Financial Times' Alphaville property:
FTAV, Feb 18
As BlackRock reveals it is dabbling in bitcoin, it’s time to ponder how
institutional money will impact bitcoin’s prices, term structure and
lending rates.
Blackrock’s chief investment officer of global fixed income told CNBC on Wednesday that the world’s largest asset manager had “started to dabble” in bitcoin. This was all the excuse bitcoin needed to charge ahead to a new record high of $52,533.
The institutional buzz around bitcoin started when US-listed Microstrategy, a business intelligence company, revealed in August 2020 that the company had invested $250m of its excess cash in bitcoin as a hedge against the dollar. One inadvertent consequence of the treasury management move was that Microstrategy’s shares would soon be considered a precious “listed” proxy for owning bitcoin outright, especially by those money managers bound by strict risk-controlled investing mandates that stop them dabbling in crypto.
The incident proved a gateway moment for institutional interest in bitcoin, culminating in December’s big reveal by Ruffer, the UK-based asset manager, that it too had made a primary investment worth £550m. Bitcoin has been on a tear ever since then, propelled even higher in recent weeks by electric carmaker Tesla’s announcement that it too has been diversifying its treasury holdings into the crypto asset.
The truly big question is what does it mean for bitcoin now that institutional names are dipping their toes in the asset class and potentially bringing major money inflows with them (beyond the obvious of “number go up”). A commodities investing echo? One good precedent to look at is the impact pension funds had on commodity prices when they similarly decided around 2005/6 that they needed to look to alternative investments to diversify against their dollar exposure.
While the idea of pension funds investing in commodities such as oil, metals and even agricultural goods (usually through futures) is entirely normal today, back in the mid-noughties it represented a big step away from conventional money-managing mandates. The big point of controversy at the time was the lack of yield (a source of controversy with gold itself as well) and hence the overt price risk this would expose the funds to.
To lower the risk, pension funds and institutional managers mostly piled into commodity index products that tracked the Goldman Sachs Commodity Index (GSCI) or into commodity ETFs. Institutional money’s collective impact on the commodities futures curve over this period is still hotly debated, but it has long been theorised that it may have contributed to the overpricing of commodity futures relative to their spot-price fundamentals, leading to the normalisation of a contango structure in commodity prices, especially after the 2008 financial crisis.This, in turn, sent a signal to the market to keep producing commodities irrespective of natural demand because the contango structure made it financially lucrative to produce for the simple purpose of storing rather than consuming them. None of this would have been financially viable if not for the institutional wall of money sitting on the futures curve happy to lose value at every consecutive monthly roll of futures positions into a contango structure. The effect of this was a negative yield for such commodity investing funds.For as long as the price of commodities kept going up to compensate for the yield destruction the positions proved manageable. But once commodity prices reversed, it didn’t take too long for institutions to figure out sitting idle on the curve was a lossmaking strategy that could be exploited by physical producers and trading houses on the ground. When that happened, backwardation returned to the market unlocking all the previously stored-up commodities that had been funded by the contango structure. The effect was a total collapse in the price of commodities (led by oil) over the course of 2015 (GSCI chart courtesy of Trading Economics):
Institutional crypto yield generation? Unlike core commodity markets, bitcoin’s futures are illiquid and immature. Even so, the natural state of bitcoin’s futures curve has for a long time (much like gold’s) tended towards a contango structure, not backwardation like it does with most other commodities. This is down to its financialised nature....
....MUCH MORE
I mean much more. How's this line grab you:
