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Yahoo U: Banking vs. Bitcoin

Yahoo Finance’s Brian Cheung breaks down the differences between banking and Bitcoin.

Video Transcript


ZACK GUZMAN: Welcome back to "Yahoo Finance Live." I want to spotlight here the update we're seeing play out in the crypto markets. Of course earlier this week we saw Bitcoin top $20,000 a coin for the first time in history. A lot of people tying that back to what we saw at the end of 2017 when we got close to those levels. But some investors are saying this time is very different with a boost coming from institutional investors. Big banks looking at crypto as well here.

And in today's Yahoo U, I want to bring on Yahoo Finance's Brian Cheung to break down what exactly that means. Brian.

BRIAN CHEUNG: Well, Zack, class is in session. And in the 2018 song "Big Bank" by YG, rapper Big Sean once said that "three coin, that could buy you a whole semester," but these days it seems like one coin would be enough for that. And I don't need to remind anyone that Bitcoin has been on a tear, especially this week. It's been hitting new all-time highs, blowing through the 20,000 level. But how did we actually get here, and is there anything specifically about the market structure, maybe market demand for Bitcoin that explains that rise?

So I want to kick things off by just illustrating for you the overall picture for what Bitcoin looks like over time, right? So this should not be an unfamiliar story to many of you. The price has really gone up pretty dramatically over the past few months, and something snapped in this fall that really sent Bitcoin rocketing higher.

So the challenge, though, is that why is this happening, right? Everyone's got a different investing thesis for Bitcoin, but one common talking point is that over this period of time, the central banks around the world really aggressively ran up their paper printing. So a lot of investors that are concerned about that are trying to turn to some sort of finite resource to use as an inflation hedge.

Now, for a while the literal gold standard for inflation hedging was just that, gold, right? And indeed gold has risen by about 25% year to date, as illustrated by the blue line here, which is gold to US dollars. But Bitcoin over time, as you can tell by the crunched y-axis here, has really surged over that period of time. Again, this is the Bitcoin to USD conversion. It's surged over 200% over the same time period. You're looking at year to date, but as you can see, most of the rise has really been as of this fall.

So the question now is who is buying all of this, right? And we've heard about the Robinhooders, the retail investors, but the big story for Bitcoin might be institutional investors. And this is one illustration, right? So this is institutional inflows into two types of funds, Gray's Coin-- sorry-- the Grayscale Bitcoin Trust, which is illustrated here in purple, and the gold exchange-traded funds, or ETFs, in blue.

Now, gold has been the name of the game for quite a while, so there's no surprise that, overall, the gold ETFs have been historically larger than the Bitcoin trust, but you can notice that the tide is kind of changing here, right? Over the past few months, flows have come out of gold ETFs while flows have gone into Bitcoin trusts.

So JPMorgan's market strategy team, which really illustrated and pointed this out, said last week that they expect that trend to continue. Why? Well, because gold's been the name of the game for a while, as I mentioned. Institutional investors, however, on the Bitcoin side of things are really in the early stages of adoption. Very small shares of institutional portfolios, family-office assets-- which, by the way, is a lot of money-- are not really storied in Bitcoin. So as the price goes up, they've been kind of increasing their warmth towards investing in this type of space, which is the reason for why JPMorgan says expect these trends and flows to continue.

But I want to note that this isn't the only way that institutions are making waves in the market for Bitcoin, and there's been signs and specific news headlines that the banking and financial services industry are warming up to Bitcoin as well.

So take, for example, the July 22 announcement a few months ago from one of the nation's major banking regulators. That's the Office of the Comptroller of the Currency. And the OCC said it recognized banks' authority to provide safe keeping and custody for crypto assets. So in other words, it's no problem for national banks to hold on to private keys. That could be a major step for maybe an extension beyond crypto custody services at some point. Think transaction settlements or tax services, maybe even fiat-currency exchange.

And then there was obviously the private industry, and in October you'll recall that PayPal said it would offer a new service that allowed users to buy, hold, and also sell crypto. At the time they said that they acknowledged the, quote, "migration toward digital payments that may have been driven by COVID." A very interesting development there. But as we talk about Bitcoin and really any asset class, we need to acknowledge that it's really hard to pin down price movements to one specific news. But the overall story is that the rally hasn't come from nowhere, right? And a lot of these threads could bleed into 2021 as well, which could signal that next year could be a very interesting year for the crypto curious as well. And with that, class is dismissed.

ZACK GUZMAN: Yeah. No, for sure. There's a lot to discuss there too, and you highlighted the rotation into the Grayscale Trust. But, you know, we got a new one there too in terms of the Bitwise Crypto 10 as well, something that we've been covering this week. A lot of enthusiasm when we see those price moves in some of those things. Not expected to see price moves like that too when it's an index fund around crypto. But Brian Cheung, appreciate that insightful lesson there.