Bitcoin Will Reach $1 Million Because of This Little-Known Phenomenon

The unique features of Bitcoin (CRYPTO: BTC), which make it unlike any other asset in the world, are becoming more and more recognized and understood by investors. The recent approval of spot Bitcoin exchange-traded funds (ETFs) will strengthen this understanding as these ETFs facilitate investors’ exposure to Bitcoin.

While the approval of spot Bitcoin ETFs has been widely celebrated as an unofficial stamp of legitimacy, signaling that Bitcoin is here to stay, there is another important dimension to consider. Once this is fully understood, it will become clear that Bitcoin has the potential to reach the coveted $1 million price tag.

Image source: Getty Images.

Understanding the current landscape

The approval of spot Bitcoin ETFs revolutionizes how the average investor or retail investor can add Bitcoin exposure to their portfolio. Investors can now bypass the complexities of navigating cryptocurrency exchanges and managing digital wallets by purchasing shares of one of these ETFs through a brokerage firm.

This development has the potential to significantly increase demand for Bitcoin’s limited and dwindling supply. But as transformative as increased access for retail investors will be, it will pale in comparison to the tidal wave of demand expected from institutional investors entering the market.

Before diving into the numbers, it’s important to understand who institutional investors are. I’ve long heard Bitcoin enthusiasts claim the future of institutions, but I’ve never quite understood what that means. Institutional investors are organizations that invest money on behalf of their customers. These include pension funds, pension plans, sovereign wealth funds and hedge funds, among others. Essentially, they manage and invest large amounts of money.

Prior to the approval of spot Bitcoin ETFs, institutions were either prohibited from or hesitant to enter the Bitcoin market due to the complexities of owning digital assets. However, with the emergence of these ETFs, institutions can now easily include Bitcoin in their broad portfolios, opening the door to a significant inflow of institutional capital into the Bitcoin market.

It’s time to crunch some numbers

So how effective will these institutions be? As of May 15, it is estimated that approximately 700 professional investment firms hold these spot Bitcoin ETFs, worth approximately $5 billion. Leading the way is Millennium Management, an investment firm that manages more than $64 billion, with $1.8 billion tied up in Bitcoin ETFs, accounting for about 3% of its total portfolio. But the list goes on and includes names like Morgan Stanley (the sixth-largest bank in the United States), Bracebridge Capital (a hedge fund that manages Yale and Princeton investments), and even the Wisconsin State Board of Investment.

The story continues

But as it currently stands, retail investors are the primary holders of spot Bitcoin ETFs. Reports show that about 10% of assets tied to ETFs come from institutions. However, this number is increasing and will continue to increase.

The flow of institutions into the Bitcoin market will likely be gradual, as they typically conduct extensive due diligence before making allocations. Unlike retail investors who can quickly enter the market by purchasing shares of an ETF, institutions often take the time to research Bitcoin’s impact on their portfolios before making small allocations.

But after doing their research, I think they will all probably come to the same conclusion: Bitcoin’s unique characteristics make it a must in portfolios. Eventually, it will gain widespread adoption among institutional investors, leading to an influx of capital.

It’s impossible to say how much money, but based on recent research claiming that a 5% allocation is the ideal amount of risk, we can begin to estimate the potential impact of institutional investors. With 5% of the massive $129 trillion in assets they manage, Bitcoin’s market cap could rise to over $7 trillion and its price to over $400,000.

However, some analysts argue that a 5% allocation may be too conservative. Most importantly, a recent ARK Invest study suggests that the ideal risk level should be closer to 19%. If this happens, Bitcoin’s price could rise above $1.3 million.

Little-known theory comes into play

What we are witnessing marks the beginning of a fascinating phenomenon: game theory. Game theory, in essence, suggests that rational actors, in this case institutional investors, will act strategically in their best interest based on the actions of others.

As institutions observe their peers reaping the benefits of Bitcoin investments, they will inevitably face pressure to join the fray or risk being left behind in the race for returns. This dynamic, driven by the desire to outperform peers and secure maximum returns, will likely lead to an increase in Bitcoin adoption and investment that we have not seen before.

While retail investors have played an important role in Bitcoin’s journey to date and will continue to be an important group, the entry of institutions represents a paradigm shift. The sheer scale and resources at their disposal will not only strengthen Bitcoin’s market dynamics, but will also bring a new level of competition and urgency. As institutions compete for supremacy and seek to exploit Bitcoin’s potential, the game will evolve in unpredictable ways and take Bitcoin to new heights.

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RJ Fulton has positions in Bitcoin. The Motley Fool has positions in Bitcoin and recommends it. The Motley Fool has a disclosure policy.

Prediction: Bitcoin Will Reach $1 Million Thanks to This Little-Known Phenomenon Originally published by The Motley Fool