The long rallying cry of digital assets has been “the institutions are coming.” Messari’s research analyst Ryan Watkins recently authored an excellent research piece displaying what the institutionalization of the digital asset space might look like in terms of price attribution to bitcoin.
His analysis uses simple mathematics to navigate to an expected market capitalization (market cap) and per coin price. Starting with assets under management (AUM) for the largest institutional investors multiplied by an allocation percentage range of their AUM to digital assets. The resulting figures can be summed as the “aggregate demand,” which would increase bitcoin’s market cap (sans “exuberance” multiplier for simplicity).
Per Watkins, the above graphic implies “an aggregate 1% institutional allocation to Bitcoin can easily bring Bitcoin’s market cap above $1 trillion, or over $50,000 per BTC.”
Earlier in the week, the announcement that PayPal and Venmo will begin supporting bitcoin transactions, similar to Cash App, resulted in a price surge, along with bullish prognostications noting PayPal’s 300 million users. Since Cash App’s launch of supporting bitcoin purchases in 2018, the revenue attributed to their bitcoin business has grown demonstrably each quarter.
Despite the bullish potential for PayPal’s 300 million users to offer an influx of new retail demand for bitcoin, cracking into the numbers offers a more muted response.
Watkins notes, “similar analysis based on PayPal PYPL 's funds receivable and customer accounts...that balance is currently just under $23 billion.”
Assuming that account balances remain static and those idle funds are allocated to bitcoin within a band of 1% to 5%, that new demand would generate between $230 million and $1.15 billion boost to market cap. That figure alone is impressive, but considering bitcoin’s market cap is already $168 billion, the $1.15 billion, maximum, potential increase would only result in only ~ $9,300 per coin.
However, those customer cash balances are not investment funds, thus the above analysis is inexact, which could skew results.
Despite the gloomy analysis, the PayPal announcement offers more than a retail demand boost for bitcoin price. One of the largest payment processors in the world getting into the “bitcoin business” generates another positive signal to institutional investors that digital assets like bitcoin are legitimate and deserving of investment.
Thus, the PayPal deal might be a “dud” for bitcoin in the near-term, but could potentially pave the way for increased institutional adoption in the future, which would dramatically increase price.
Only time will tell how the dominoes fall.
Disclosure: The author owns bitcoin and ethereum.
Chris is the Founder of Valiendero Digital Assets, a leading quantitative cryptocurrency hedge fund leveraging machine learning and data-driven strategies to make
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Chris is the Founder of Valiendero Digital Assets, a leading quantitative cryptocurrency hedge fund leveraging machine learning and data-driven strategies to make probabilistic investments over a variety of liquid digital assets. He received his graduate degree from Carnegie Mellon University's Tepper School of Business where he concentrated in analytics. He has authored numerous articles and long-form research reports for leading blockchain media outlets like Forbes, CoinDesk, and Brave New Coin, which have been distributed globally. Chris chats about digital assets, blockchain projects, and their market structures from a data-first perspective as to provide useful insights rooted in data rather than opinion....