- The bitcoin market is composed on buyers, sellers, and long-term investors
- Market growth in 2020 has been primarily attributed to institutional investment and technology advancements that allow more individuals to participate
- The bitcoin market continues to expand rapidly, and is now larger than many major corporations
The bitcoin market is composed of individual buyers and sellers, legal and dark merchants that accept bitcoin, institutions trading bitcoin, as well as long-term investors. The market cap of Bitcoin has grown to over $500 billion, and includes a wide range of investors and institutions. When Bitcoin was created, transactions were primarily made using personal wallets and private keys on the Bitcoin blockchain. While the market was in its infancy, individual investors made up the majority of the market, and financial institutions and regulators shied away from involvement. As the market has matured, institutional investors have entered the market, and continue to do so at a rapid pace. New Bitcoin institutions, including exchanges, brokerages, and trusts, have entered the market as an alternative method to transacting direct on the Bitcoin network, and the market has grown to include bitcoin derivatives
Origins of the Bitcoin Market
The Bitcoin protocol was created by Satoshi Nakamoto and released in 2009. Prior to 2011, there were only a few single-use cases of bitcoin as a payment for legal goods and services. However, in 2011 and the following years, a growing number of payment processors, including various online marketplaces and even ATM’s, began accepting payments and initiating transactions in bitcoin. The bitcoin market was primarily composed of peer-to-peer transactions on the bitcoin blockchain until 2013, when the first major cryptocurrency brokerage began operating.
Growth of the Bitcoin Market
Institutional adoption is a recent trend that has been a major driver of growth in the bitcoin market since 2018, especially in 2020. A growing number of hedge funds and other financial institutions are investing in bitcoin as a store of value and inflation hedge. Government regulation has also driven investor confidence in bitcoin. Rapid adoption and proliferation of blockchain technology, including improved security and scaling products, have also allowed new avenues for investors to become involved in the market.
Exchanges, brokerages, and trusts are the three most common avenues for individual investors to buy and sell bitcoin for other assets. Bitcoin derivatives are a relatively new entry to the market, allowing investors to gain indirect exposure to bitcoin.
Exchanges match buyers and sellers of an asset pair, such as U.S. dollars and bitcoin. Exchanges do not hold any assets themselves, and make money by charging and collecting a transaction fee. The number of exchanges available to investors has increased dramatically in recent years, and exchanges now account for over 60% of all trading volume in the market.
Unlike exchanges, brokerages always hold the asset, and act as either the buyer or the seller. Brokerages make a profit on the difference between the price at which they buy the asset, and the price at which they sell the asset. They can also provide custody and lending services. Brokerages typically have stricter security and regulation requirements compared to exchanges.
A bitcoin trust offers investors the opportunity to indirectly gain exposure to bitcoin. They use investments to buy bitcoin and then allow individuals and brokerages to buy and sell Trust shares. The value of the shares are a reflection of the value of bitcoin, so buyers can expose themselves to the benefits of bitcoin price action without owning bitcoin. However, trusts often charge high management fees, and investors do not own any bitcoin themselves.
Since Bitcoin was created, merchants have been testing its use as a form of payment. One of the most well-known incident of bitcoin being used for payment was an order of pizza bought for 10,000 BTC. Early on, bitcoin was also used by many dark markets and gambling sites. Now, an expanding list of major retailers, service providers, and organizations accept bitcoin as payment, including Microsoft, Home Depot, and Whole Foods. Several money lending companies also offer customers the ability to use Bitcoin as collateral.
Bitcoin derivatives are a relatively new bitcoin product on the market. They allow investors to gain exposure to the price of bitcoin without owning any bitcoin. Unlike bitcoin, derivatives are linked to a specific company, which creates additional counterparty risk. Trust shares are the most common example of a bitcoin derivative offering. The number of derivatives products available on the market grew rapidly beginning in late 2017, and offerings continue to grow as the bitcoin market grows.
Notice: River Financial does not provide investment, financial, tax, or legal advice. The information provided is general and illustrative in nature and therefore is not intended to provide, and should not be relied on for, tax advice. We encourage you to consult the appropriate tax professional to understand your personal tax circumstances.