2020 Bitcoin Retrospective

January 28, 2021  •  22 min read

Introduction

2020 was a strange year, but it seems fitting that bitcoin, a digitally native asset, thrived, as we all were forced to become members of a new, digitally native society.

Over the last twelve years, bitcoin awareness has increased, narratives have evolved, and infrastructure has matured. Simultaneously, monetary and fiscal policy responses to crises have become even more unorthodox, creating a perfect storm for bitcoin’s widespread adoption first by retail investors and now institutional investors, who now have the tools to include it in their portfolios. In this report, we revisit five trends that received much of the attention of the industry over the last year:

• Macro conditions creating a ripe environment for bitcoin adoption
• Bitcoin scarcity supercharged by supply constraints
• Bitcoin market maturation, paving the way for institutions
• Institutional adoption – gradually, then all at once
• Retail adoption – bitcoin as a millennial store of value

Macro conditions create ripe environment for bitcoin adoption

The macro backdrop is one of the key factors driving demand for bitcoin today and was one of the key factors that inspired the creation of bitcoin, a digitally native, scarce, decentralized asset with a transparent, predictable, and rigid monetary policy. Below, we discuss interest rate changes, unparalleled levels of quantitative easing, fiscal stimulus, and potential inflation as drivers for interest in bitcoin.

Source: Ikigai, Yahoo Finance (December 2020)

Interest rates

The first response to the pandemic by central banks was lowering interest rates to the zero lower bound. For example, after an initial interest rate cut of 50 bps, the Federal Reserve (the “Fed”) cut its benchmark short-term interest rate by another 100 bps to the 0 to 25 bps range in March 2020.ⁱ In September, the central bank indicated it would keep the Fed Funds Rate at zero through 2023 and potentially longer.ⁱⁱ

As interest rates reached the zero lower bound, many investors likely began to question the role of fixed income securities in portfolios. Simultaneously, with yields on fixed income securities at historic lows and stuck there for the foreseeable future, the opportunity cost of having exposure to non-yield generating assets like bitcoin decreased as well.

Source: St. Louis Fed (December 2020)

Additionally, with benchmark rates at zero, the slightest level of inflation implies negative real rates (see chart “5-Year Treasuries vs. TIPS”), further increasing the attractiveness of a non-yield generating asset. In some parts, nominal rates are negative even before factoring in potential inflation. In fact, global negative yielding debt peaked at more than $18 trillion in December 2020.ⁱⁱⁱ

Source: St. Louis Fed (December 2020)

Source: Bloomberg Barclays Global Aggregate Negative Yielding Debt (December 2020)

Quantitative easing

Central banks introduced quantitative easing (QE), dubbed “the great monetary policy experiment of the last decade,”^iv as a novel monetary policy tool in the 2007-2009 global financial crisis.^v It refers to creating money to facilitate large scale asset purchases. The tool has since been normalized, with central banks like the Fed committing to unlimited levels of easing, saying it will purchase “the amounts needed to support smooth market functioning and effective transmission of monetary policy to broader financial conditions.”^vi

The scope of central banks’ quantitative easing efforts is reflected in the change in their total assets. G3 central banks (the European Central Bank – ECB, Federal Reserve – Fed, and Bank of Japan – BoJ) saw their total assets rise by about $8 trillion last year, a level of growth which took eight years to achieve in the global financial crisis.^vii While quantitative easing is not new, the speed and extent to which central banks have stretched the tool is. In the U.S., the purchase of billions of dollars in corporate bonds and investment grade debt by the Fed is a new phenomenon as well.^viii

History shows that intervention is very difficult to unwind even once the emergency phase is over. For example, while the Fed’s total assets gradually contracted to ~$3.8 trillion by mid-2019, a level last seen in September 2013, the Fed was never able to reduce total assets to levels seen before the global financial crisis.

Source: St. Louis Fed (December 2020)

Fiscal stimulus

The role of quantitative easing in the last crisis was to re-capitalize banks that were reluctant to lend, which meant funds did not make their way into the money stock (M2), which includes cash, checking and savings accounts, and other liquid assets.^ix

In 2020, the role of expansionary monetary policy of central banks shifted, as it was also used to fund fiscal spending targeted at individuals and smaller businesses that needed it most. This central bank funded fiscal stimulus along with subsidized loan programs^x and greater household savings contributed to a sharp increase in M2 in 2020, from $15.4 trillion in January to $19.2 trillion at the end of December.^xi

The average personal savings rate in the U.S. from the end of the 2008 recession until the beginning of the coronavirus crisis was 7.3%. It reached 33.7% in April and was still at a historically elevated level of 12.9% by November.^xii

Source: St. Louis Fed, ECB , BoJ (December 2020)

Inflation

While inflation is not guaranteed by a rapidly growing M2, when inflation does occur, either in assets and/or consumer prices, it is generally preceded by an increase in the level of M2.^xiii

The argument against inflation occurring is simultaneous deflationary forces at play. Specific to the pandemic, this includes unemployment, lockdowns, and supply chain disruptions. These factors have led to a drop off in the velocity of M2, along with longer-term deflationary forces like aging demographics and technological progress.

However, the rapidly expanding money stock and the coordinated loose monetary and fiscal policy could create a situation where too many dollars are chasing too few assets and/or goods as pent up demand is released when the economy fully re-opens, creating an uptick in velocity.^xiv

In addition, in the U.S., the Fed also announced a policy change of average inflation targeting last year, meaning the central bank would allow inflation to fluctuate above an average for some time.^xv This implies some inflation is desirable by policymakers, especially with public debt levels as high as they are. What is unclear is how much inflation they would tolerate and what tools they have at their disposal to combat inflation if it surpasses that level.

Source: St. Louis Fed (December 2020)

The radical intervention we’ve seen from central banks and governments in the economy and the potential consequences of this intervention have led many investors to reassess how bitcoin’s properties can play a role in their portfolios as the impact plays out.

Bitcoin scarcity supercharged by supply constraints

Bitcoin is a scarce asset due to its fixed supply. It is perfectly inelastic in that an increase in demand does not translate to an increase in supply. Price is the only release valve for changing demand. Bitcoin has a predetermined supply schedule and supply cap of 21 million units that is hard coded into the protocol. The supply schedule refers to the halving of block rewards every four years until total bitcoin in circulation reaches 21 million.

The approximate timing of block reward halvings is known in advance and the issuance rate established at network launch is not subject to changes by any entity or group of entities, providing a level of predictability and transparency that does not exist in any other asset. Combine that with a greater number of market participants removing bitcoin from exchanges and holding bitcoin for longer periods of time, further contributing to its scarcity.

Bitcoin halving

In May 2020, the network experienced its third halving, with the block reward dropping from 12.5 bitcoins per block (~1,800 bitcoins per day) to 6.25 bitcoins per block (~900 bitcoins per day), or an annual issuance rate below 2%. As expected, the network experienced the event as planned, with no surprises, changes, or challenges.

That the network was able to enforce and implement its predetermined monetary tightening uninterrupted presented a stark contrast to central banks inflating the supply of their respective fiat currencies at unprecedented rates in response to the pandemic.

Source: Coin Metrics (December 2020)

Simultaneously, another factor constraining the portion of supply available to satisfy demand was high levels of supply that haven’t moved in more than one year. This metric increased over 2020 and reached a high of 63.5% in September 2020. This metric is also referred to as inactive supply and may be considered a proxy for the supply of bitcoin held by longer-term holders.

The increase in inactive supply to its all-time high in September coincided with a more than 40% increase in the price of bitcoin relative to the beginning of the year. A similar pattern may be observed in the first half of 2019 in the chart below. While the inactive supply contracted to 59.2% by the end of the 2020, it was still higher than the maximum level the metric reached from January 2017 through December 2019.

Further, the 2020 average 1+ year inactive supply and 6+ month inactive supply was 61% and 73%, respectively – the highest level from 2013 through 2020.

Source: Coin Metrics (December 2020)

Glassnode, an on-chain data provider, has taken the analysis of the supply of bitcoin that falls into different liquidity categories one step further, leveraging its classification of entities and their behavior to determine “illiquid supply,” “liquid supply,” and “highly liquid supply.” We recommend reading Glassnode’s piece on the topic for insight into how they arrive at the metrics.

According to Glassnode, illiquid supply can be interpreted as bitcoin held by entities “that hoard coins in anticipation of long-term BTC price appreciation.” At the beginning of January 2021, illiquid supply as measured by Glassnode stood at 14.6 million bitcoins, or 78% of the circulating supply. This represents a year-over-year increase of more than 1 million, or 8.5%.

Source: Glassnode (December 2020)

Source: Glassnode (December 2020)

Another measure that sheds light on participant behavior is the amount of bitcoin on exchanges. The idea here is that market participants move funds to an exchange when they are planning to trade the assets. They move funds off exchange, potentially to longer-term, more secure storage when they are planning to hold the assets. The balance of bitcoin on exchanges declined 22% in 2020.

Source: Coin Metrics (December 2020)

It is natural for investors to prepare to hold assets and illiquid supply to increase in the early innings of a bull market. The difference in the latest rally is the historically high levels the metrics have reached. These metrics will continue to provide insight into investor behavior in response to changes in price (and vice versa), especially if performance and sentiment continues to trend in the positive direction it has in the last few months.

Bitcoin market maturation

Bitcoin’s market has matured notably in the last few years driven by growth in a more robust retail and institutional infrastructure, the entrance of incumbent service providers, and expanding “prime brokerage” offerings that reduce fragmentation and improve efficiency. This has resulted in lower volatility and tighter bid-ask spreads, on average, as well as growing institutional volume.

Volatility

Bitcoin experienced a historic spike in volatility in March, as the volatility in many asset classes rose to record highs in reaction to coronavirus related panic. As shown in the chart below, volatility declined to a local low a few months later. In July 2020, the average annualized 30-day volatility was 35% vs. 138% in March. It picked back up at the end of the year, especially in December as markets thinned out due to the holidays and bitcoin’s price rose above previous all-time highs. The average annualized 30-day volatility was 78% in December 2020.

Source: Coin Metrics, Yahoo Finance, St. Louis Fed (December 2020)

Despite the bout of volatility bitcoin experienced in March and April and the increase in volatility at the end of the year, the average annualized 30-day volatility over 2020 was slightly lower than its level in 2019. On the other hand, the average annualized 30-day volatility of equities, specifically the S&P 500, and gold, represented throughout this article and subsequent charts by the Gold Fixing Price 10:30 a.m. (London time) in the London Bullion Market,^xvi in 2020 was higher relative to 2019. While bitcoin remains incredibly volatile relative to other assets, the ratio of bitcoin’s volatility to that of the S&P 500, and even gold, declined in 2020.

Source: Coin Metrics, Yahoo Finance (December 2020)

Source: Coin Metrics, Yahoo Finance (December 2020)

As we articulated in our Addressing Persisting Bitcoin Criticisms piece, bitcoin’s volatility could continue to decline with product development and growing liquidity leading to greater ownership, participation, and heterogeneity of market participants. However, it is important to reiterate why bitcoin exhibits elevated levels of volatility, despite improvements in infrastructure, growth in regulated derivatives, and growing institutional activity. Bitcoin trades off price stability for supply inelasticity and intervention resistance. Increasing demand does not result in an increase in supply.

Additionally, the bitcoin holder behavior we outlined above further limits the liquid supply of bitcoin available. Thus, volatility may be considered a side effect of storing wealth in a one-of-a-kind asset that offers other unique properties to compensate.

Correlation

One of bitcoin’s attractive features is that it has been historically uncorrelated to other assets over its lifetime. For example, bitcoin’s average 60-day correlation from January 2015 through December 2020 to the S&P 500 was 0.03, to gold was 0.05, and to the dollar index (DXY) was -0.06, according to data from Coin Metrics.

Correlations to the S&P 500 and gold were elevated relative to historical averages for a substantial portion of the year, starting in March 2020 as the correlation of many asset classes went to 1 in response to the Coronavirus crisis. Bitcoin’s peak 60-day correlation was 0.51 versus the S&P 500 and 0.65 versus gold. In contrast, bitcoin exhibited a tight inverse correlation with the dollar last year, negative 0.51 at the peak.

Source: Coin Metrics (January 2021)

Source: Coin Metrics (January 2021)

This was the first time in its relatively short life that bitcoin and its market infrastructure faced extreme duress, offering an important lesson in risk management, especially for platforms offering and participants trading with extreme leverage, and hopefully preparing the industry to better weather similar crises in the future.

However, after experiencing a period of higher correlations, bitcoin’s movement with the S&P 500, and even gold, declined significantly. Correlation fell to levels seen prior to the liquidity panic in March and April, giving rise to discussions about bitcoin’s ability to improve portfolio diversification, especially over long periods of time.

We wrote in our report on Bitcoin’s Role as an Alternative Investment that bitcoin could become more correlated to other assets as market participants in traditional assets increasingly overlap with market participants in bitcoin markets.

However, bitcoin is relatively shielded from events (such as a pandemic) that have negatively impacted short- and long-term fundamentals of other assets – it is natively digital and global and does not have a single point of failure. Also, while the “store of value narrative” rose to prominence in 2020 and will likely dominate the rationale of institutional investors making an allocation to the asset, bitcoin may have different utility to different groups of people globally. These factors combined have contributed to bitcoin’s lack of correlation historically and could continue to do so going forward.

Trading Volume

In 2020, spot trading volume on a handful of regulated exchanges with the BTCUSD trading pair (specifically Bitstamp, Coinbase, Kraken) did not reach levels seen in 2017, despite bitcoin rising past all-time highs set in the 2017 bull market. At first glance, this seems contradictory to the narrative that the latest bull run is driven by institutional demand, which should correspond with higher volumes.

One potential explanation is that institutions trading in size are making trades over the counter, or OTC, (outside crypto exchanges) to achieve better price execution on large trades, among other reasons. In November, The Block reported that OTC trading desks were “clocking in record volumes” above levels seen in 2017 driven by new institutions. More recently, Genesis reported an increase in digital asset spot volume in its 2020 Q4 Market Observations report,^xvii the majority of which is “traded on an OTC basis with major institutional counterparties.” Additionally, an increase in stablecoin denominated trading volume would not show up under BTCUSD.

Source: Coin Metrics (December 2020)

Spreads

Bitcoin’s daily average midpoint price by hour across major platforms offering BTCUSD trading was in a tight range in 2020 (in the first chart below, it looks like a single line). This provides evidence of improving efficiency, declining asymmetries, and the blurring of lines across bitcoin markets hosting significant volume and activity, especially with the emergence of more prime broker style offerings.

Source: Coin Metrics (December 2020)

Following a spike in March and April 2020 when market structure was under significant stress, daily average bid-ask spreads by hour compressed notably for the remainder of the year, staying below 0.08% across all exchanges shown below in the back half of the year.

Spreads in Q4 2020 were slightly higher on some platforms quarter over quarter as volatility increased in line with bitcoin’s price while liquidity was relatively lower over the holidays.

Source: Coin Metrics (December 2020)

Source: Coin Metrics (December 2020)

With greater regulatory clarity from agencies like the OCC, we could see greater involvement by traditional institutions in bitcoin market infrastructure. This involvement could contribute to further improvements in market efficiency and liquidity and create a flywheel effect in encouraging further institutional adoption. As their presence and allocation grows, institutional allocators will also demand sophisticated “prime brokerage” solutions that facilitate capital efficiency and lower fragmentation.

Institutional adoption – gradually, then all at once

The industry has been heralding institutional adoption at least since the beginning of 2018. In 2018 and 2019, most of the institutions adopting bitcoin were infrastructure providers laying the groundwork for institutional investors to get involved rather than investors announcing allocations. We can say unequivocally that institutional investors arrived in 2020.

CME Bitcoin Futures

CME’s cash-settled bitcoin futures data provide evidence of institutional activity. CME is considered a premier exchange given its regulatory standing and experience facilitating futures trading in other asset classes.^xviii This lowers the barrier for institutional investors getting exposure to bitcoin through the exchange’s bitcoin products. Volume and open interest displayed a notable increase in the back half of the year relative to the first, with volume increasing two-fold and open interest rising almost five-fold.

Source: CME (December 2020)

At the beginning of the year, CME open interest was about 5% of global open interest across exchanges. By the end of the year, CME captured 16% of the market and the number two spot by open interest.^xix As of January 26, CME is the number three exchange by bitcoin futures open interest and commands ~17% of the market.

Source: The Block, Bybt (December 2020)

Source: The Block, Bybt (December 2020)

Large open interest holders represent another sign of “strengthening institutional interest.”^xx The number of large open interest holders of CME bitcoin futures, which refers to entities that hold a minimum of 25 contracts, or 125 bitcoins,^xxi also compounded in 2020, with the monthly average rising from 56 in January to 100 in December, a 78% increase.

Source: The Block, CTFC COT (December 2020)

Grayscale Bitcoin Trust (GBTC)

The Grayscale Bitcoin Trust (GBTC) provides institutional investors with a passive, regulated vehicle to express interest in bitcoin. Grayscale handles the purchase and safekeeping of assets, which may be valuable to investors that are less familiar with the industry.

GBTC becomes tradeable on secondary OTC markets after a 6-month lockup. Liquid shares have historically traded at a premium to NAV. Investors and traders may also be interested in the trust to benefit from the arbitrage opportunity the structure creates (i.e. buying shares at NAV in the private placement and short-selling GBTC shares trading on secondary markets at a premium).^xxii

In the Q4 2020 report, the company highlighted that 2020 inflows into GBTC was more than four times cumulative inflows over the prior six years. GBTC’s AUM grew from $1.8 billion at the beginning of 2020 to almost $21 billion as of January 2021, driven by inflows into the product as well as bitcoin’s price surge.^xxiii GBTC holds about 647K bitcoins as of January 27, 2021,^xxiv almost 150% higher than the end of 2019. Notably, once bitcoin enters the trust, it stays put. In Q4 2020, inflows into GBTC were 87% of total inflows across products in the quarter, vs. 72% in Q3 2020.^xxv About 93% of investors across Grayscale products were institutional investors, especially asset managers, in Q4.^xxvi

Source: Grayscale (December 2020)

Source: The Block, YCharts (December 2020)

Bitcoin Investment Funds

We saw a number of traditional investment firms launch passive bitcoin funds in 2020, including NYDIG (subsidiary of Stone Ridge, a $10 billion alternatives asset manager), SkyBridge Capital (which manages $7.7 billion in assets), and Osprey Bitcoin Trust (a subsidiary of REX Shares, provider of ETPs), which reopened its trust for private placement by accredited investors. Participation in such funds are generally limited to accredited investors.

The fund launches by these companies are likely a direct response to institutional demand for accessible vehicles offered by traditional institutions who have an opportunity to establish a new revenue stream. Interest in these funds may also be driven by investors who traditionally gain exposure to other assets via funds, face operational limitations in getting direct exposure to spot bitcoin, and/or are more comfortable entering the space with a trusted partner (e.g., RIAs).

The growth in passive bitcoin products over the years is a testament to the institutionalization of bitcoin and the increasing number of products and services available to investors to express an interest in the asset, based on their level of comfort and operational or legal limitations they may face.

Source: Grayscale, Coinshares, 3iQ, 21Shares, First Asset (January 2021)

Bitcoin Allocation by Corporates and Institutional Investors

In addition to announcements by traditional institutions offering bitcoin products, even more well-regarded institutional investors publicized constructive views on bitcoin as well as investments in bitcoin last year, creating a cascading effect of investors in the same segment as well as new segments doing the same.

At the beginning of the year, few were hypothesizing that multiple macro hedge fund investors, public companies, and an insurance company would be publicly invested in the asset class, that top tier investment banks would start to publish consistent research on the industry, or that industry leaders (Ray Dalio , Larry Fink) that previously denounced bitcoin would articulate a more constructive view on the asset. The result of these events has been a significant reduction in headline and career risk, paving the way for new investors to make an allocation. Instead, remaining uneducated about bitcoin has become a risk.

Different investors had different reasons for supporting bitcoin or making an allocation, but it boiled down to a few things: 1) the properties that may allow bitcoin to function and gain share as a store of value, 2) the maturation of the bitcoin market and infrastructure, and 3) bitcoin’s potential to improve diversification in a multi-asset portfolio.

Source: Yahoo Finance, CNBC, Coindesk, ARK Invest , Fintel (January 2021)

Source: Square, Michael Saylor, , Bloomberg Markets and Finance, CNBC, The Block, Investopedia, Coindesk (January 2021)

The number and types of highly respected institutional (and corporate) allocators embracing bitcoin is accelerating along with the market’s ability to absorb increasing levels of interest. It will be interesting to see how new investors in the asset choose to express and diversify their interest. An important trend to watch will be institutional demand for indirect exposure to the industry through public offerings of crypto native companies over the next years and the extent to which these offerings may increase comfort and coverage of the underlying networks these companies support.

Retail interest – bitcoin as a millennial store of value

The “institutions are here” narrative has really dominated the news cycle, but the retail segment has been and will continue to be an important segment for bitcoin, especially millennials and Gen Z. Multiple surveys of younger, digitally native generations highlight their openness towards digital assets like bitcoin. For example, a survey by deVere group found about two-thirds of its 700+ millennial clients (born between 1980 and 1996) said bitcoin is a better safe-haven asset than gold.^xxvii

These younger generations are important for bitcoin adoption and important clients for a variety of companies because the demographic will inherit $68 trillion in wealth, the greatest generational wealth transfer, over the coming years.^xxviii Many companies have started to recognize the need to support digital assets such as bitcoin to effectively compete for these clients.

In terms of incumbent fintech companies, Square rolled out support for bitcoin in 2018 followed by Robinhood, Sofi, and most recently PayPal. PayPal has made the buying and selling of bitcoin and other digital assets available to all U.S. customers and plans to make them available globally this year. Below, we examine data from Square and PayPal as well as GBTC trading activity and on-chain addresses.

Square

Square’s Cash App is the number one finance application on the iOS iPhone App Store in the U.S., according to rankings as of January 20th, 2021.^xxix In the second quarter last year, the company reported it has about 30 million monthly active users. In the first three quarters of 2020, Cash App facilitated $2.8 billion in bitcoin volume, more than five times Square’s bitcoin volume in all of 2019.

Source: Square (November 2020)

Simultaneously, bitcoin’s share of profitability is growing as well, with bitcoin gross profit rising from 2.5% of gross profit generated by Cash App in Q3 2019 to 8.3% in Q3 2020.

Source: Square (November 2020)

The company has consistently announced initiatives that show the firm’s commitment to the bitcoin ecosystem. In 2019, Square announced a separate entity, Square Crypto, focused on funding the development on the Bitcoin network. Square Crypto has awarded grants to four Bitcoin organizations, 11 Bitcoin developers and eight Bitcoin designers.

In September 2020, Square launched a non-profit, the Cryptocurrency Open Patent Alliance (COPA) to remove barriers to collaboration and development created by patents.^xxx In October, the firm made a $50 million corporate treasury allocation to bitcoin (about 1% of total assets at the time).^xxxi Most recently, the company also announced a Bitcoin Clean Energy Initiative, pledging $10 million for companies furthering the role of clean energy in bitcoin mining.^xxxii

PayPal®

Last October, PayPal launched the ability for users to buy, sell, and hold digital assets like bitcoin in app in partnership with Paxos. It rolled out the capability to all U.S. PayPal accountholders by November 2020 with plans to expand to Venmo users and select international markets in the first half of 2021. In early 2021, PayPal said it will allow accountholders to use digital asset balances as a funding source for payment at its 26 million merchants.^xxxiii

Initial interest in the capability has been strong. During its third quarter earnings call in early November, PayPal announced that it was going to increase the weekly purchase limit from $10,000 to $15,000 “due to initial demand from customers.” Later in the month, the company announced another increase to $20,000.^xxxiv Mizuho Securities conducted a survey of 380 U.S. PayPal users about a month after the announcement and found that almost 20% of respondents had since used the application to trade bitcoin. Further, respondents that traded bitcoin also noted a subsequent increase in usage of PayPal for other purposes.^xxxv

Trading volume on itBit, Paxos’ crypto exchange, provides insight into bitcoin activity of PayPal users. The chart below shows the seven-day rolling average bitcoin to USD volume on itBit. PayPal rolled out the service to all U.S. PayPal users in November^xxxvi and itBit volume has risen dramatically since then. BTIG analyst Mark Palmer wrote that he believes “the vast majority” of itBit volume reflects PayPal customer activity.^xxxvii

Source: Coin Metric (January 2021)

PayPal will report Q4 2020 earnings on February 3rd during which it could disclose additional details on user interest in bitcoin and digital asset.

GBTC

GBTC secondary market average daily OTC trading volume picked up steadily September through December 2020, in line with the price of bitcoin. Additionally, GBTC is consistently one of the most actively traded securities on OTC markets by total trades. In December, GBTC was consistently the number one security by total trades each week.

Some activity can be attributed to institutional investors and traders looking to exploit market inefficiencies, as we mentioned in the GBTC section above. However, some portion of activity may also be explained by retail investors seeking frictionless access to bitcoin through traditional brokerage platforms. For example, in our 2019 retrospective, we highlighted that GBTC was the fifth largest holding in Charles Schwab Corp’s (“Schwab”) millennial self-directed brokerage accounts within retirement plans.

Source: Yahoo Finance (November 2020)

Addresses

One of our favorite metrics to track is the number of addresses with different levels of bitcoin holdings. The number of addresses that hold less than one bitcoin is one metric that may be directionally indicative of retail adoption of bitcoin. As shown in the chart below, the metric hit an all-time high of 32.6 million in December 2020 and ended 2020 up 17% year over year.

Source: Coin Metrics (January 2021)

We may also evaluate the total value held in addresses with less than one bitcoin. A significant portion of bitcoin is held in addresses with more than one bitcoin, but the value held in addresses with less than one bitcoin has been growing. The metric reached an all-time high of almost 964K bitcoins in November 2020, representing 5.2% of the total supply of bitcoin at the time. Growth in bitcoin held in addresses with smaller amounts of bitcoin is positive because it indicates an increase in the distribution of wealth in the bitcoin ecosystem.

Source: Coin Metrics (January 2021)

We caveat the usefulness of the metric by reminding readers that it is imperfect because a single user may have multiple addresses and multiple users that keep assets on third party platforms such as exchanges may be represented by a single or a few exchange addresses.

Glassnode has introduced the concept of “entities” to more accurately decipher addresses tied to a single entity, such as exchanges and miners, whales (entities with more than 1K bitcoin that aren’t exchanges), smaller holders and so on.

Recent data on entities collected by Willy Woo on Glassnode shows that 13% of bitcoin is held by exchanges, 10% is held by miners, 56% is held by non-whale holders, and 21% is held by whales and custodians.^xxxviii

The approval of a Bitcoin ETF is the question on the minds of many participants in the industry, given growing retail demand, the maturation of the market, and leadership changes at regulatory agencies. In the meantime, we will also keep an eye out for traditional financial institutions facilitating retail access to digital assets driven by regulatory clarity from the OCC to offer solutions and competitive pressure from fintech companies.

Conclusion

In the first quarter of 2020, bitcoin was impacted by pandemic related panic, along with all other asset classes. After initial market turmoil, the market recognized that bitcoin would not be fundamentally disrupted by the pandemic. It bounced back without any intervention and ended the year exceeding all-time highs set in 2017-2018, claiming its position as one of the best performing assets over multiple measurement periods.

An increasingly precarious macro environment drove interest and demand, causing retail investors and institutional allocators to re-evaluate their portfolios. Many investors concluded they should, at the very least, analyze and become educated about bitcoin. A subset made new or incremental allocations and interest continues to grow, as investors consider the uncertain economic aftermath of the pandemic and policy decisions.

The maturation of institutional infrastructure over prior years allowed the market to absorb record levels of demand and activity by these investor segments. With positive regulatory developments (e.g. from the OCC) allowing traditional institutions to support the digital asset industry, we expect infrastructure to improve and become more integrated with traditional asset classes, further reducing barriers to participation.