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Who Are the Actors in Bitcoin Markets?

5 min read

Miners

Bitcoin miners are essential to processing transactions and updating public ledger through the Proof-of-Work system. Bitcoin is “mined” by specialized computers that provide both security and transaction transparency. When a miner successfully mines a block, they are rewarded 6.25 new bitcoin. Miners can then sell or keep this newly minted bitcoin.

Bitcoin mining requires a high financial investment due to the mass amount of energy and hardware required, which has led to larger mining operations beginning to dominate the mining sphere. For the same reason, mining pools, in which many individual miners combine to share mining power and profit, have also increased recently.

Mining is a capital intensive venture, with high capital expenditure (CapEx) and high operating expenditure (OpEx). To cover these costs, miners immediately sell much of their newly minted bitcoin.

Retail Investors and Traders

In recent years retail investors and traders have begun to dominate the Bitcoin market, particularly because Bitcoin is increasingly viewed as a hedge against global economic uncertainty.

Bitcoin retail investors are defined as individuals who purchase or invest in Bitcoin with hopes of making a profit based on the long-term growth potential of Bitcoin. Retail investors typically do not actively trade bitcoin; they purchase supply and retain it as it grows in value.

On the other hand, Bitcoin retail traders actively buy and sell bitcoin in an attempt to realize profit in the short-term, through daily, weekly, or even monthly trades. In summary, Bitcoin traders do not hold bitcoin long-term, whereas investors do.

Institutional Investors and Traders

Due to many factors, such as a high barrier-to-entry, volatility, and relatively low market capitalization, many institutional investors and traders have been hesitant to invest in or trade Bitcoin. However, institutional adoption has increased significantly in recent years, and hedge funds and quant traders are at the forefront of institutional adoption.

Cryptocurrency hedge funds operate by charging a management fee (industry standard is 20%) to manage and grow an investor’s Bitcoin assets. Many hedge funds claim to offer high returns supported by proprietary trading and management strategies.

Similarly, quant traders, many of whom are involved in hedge funds, use a proprietary systematic approach to market trading. Hedge funds engage in both short and long-term investment and trading strategies, while quant traders typically focus on short-term and/or high frequency market trades.

Overall, institutional adoption of Bitcoin is increasing; many institutional investors, including banks, family offices, and asset managers, have begun to recommend a 5% allocation of their client’s wealth to Bitcoin.

Corporations

Corporations across many sectors have demonstrated a varied response and interest in Bitcoin. Some corporations have begun offering Bitcoin as an investment option in employee 401(k) retirement plans due to increased employee interest, while others have started implementing Bitcoin-compatible payment systems.

Bitcoin As a Treasury Strategy

Another recent unique use case for corporations has been the allocation of treasury reserve positions into Bitcoin. Historically, treasury reserve assets have been the standard allocation of cash, gold, and bonds. Most notably, on August 11, 2020, MicroStrategy, the largest independent publicly-traded business intelligence company, announced that it was investing $250 million in Bitcoin and adopting the asset as its primary treasury reserve.

MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively. Those macro factors include, among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, and global political and economic uncertainty. We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.

— MicroStrategy Adopts Bitcoin as Primary Treasury Reserve Asset Press Release

As corporate allocation of reserve positions to bitcoin becomes commonplace, it could have an impact on the Bitcoin price. Overall, Bitcoin has shown the potential to create positive improvements in efficiency through systemic changes to corporate operations, billing, and financing as more and more corporations become open to the possibilities that Bitcoin offers.

Governments

Although many governments offer conflicting opinions on Bitcoin as a currency, they are still actively involved in the Bitcoin market through auctioning off bitcoin that has been seized during or as a result of criminal activity. The U.S. Government held its first bitcoin auction in 2014, and has auctioned off hundreds of millions of dollars worth of bitcoin since then. Not all governments have dumped the asset so quickly. After seizing 200,000 BTC from a crackdown on criminal activity in May 2017, the Bulgarian government never publically auctioned the bitcoin, indicating they still hold the bitcoin, valued at $2.5 billion as of 2020.

Key Takeaways

While some people view Bitcoin as a long-term investment, others use it as a trading instrument for short-term gains.
Institutions are increasingly holding Bitcoin as a reserve asset to hedge against economic uncertainty and central bank policy.
Governments and miners usually exert sell pressure on the markets for varying reasons, but both actors may have reason to reverse this pattern in the future.