I just had the most enlightening conversation with one of my clients and I want to share the key ideas with you here.
This person is a technologist who is working for a major financial services firm that is developing some tools and infrastructure for BTC trading. We were casually discussing the price fluctuations over the last few days and this person explained the viewpoint of this particular institutions management with me (they didn't name the firm, so I can't offer any clues – feel free to speculate).
Here's what was outlined to me:
- The major financial services institutions know that BTC prices are driven by trading, not holding or spending (not 'utility', in the common sense of the term) and they therefore view it like gold (an arbitrary value store).
- They believe that BTC will have a market value based on the wealth that they (and their clients) choose to give it, just like they do with gold.
- They know that the 'asset' they are concerned with is actually the ecosystem that sustains the network, not the BTC directly.
- These institutions view the 'floor' for the BTC price as the 'minimum exchange value required to sustain the network'.
- They therefore view the health of the network (number of participants and aggregate hashrate) as the relevant indicator for establishing the price floor: when the exchange value drops to the point where the health of the network begins to show signs of weakness then they will be satisfied that they are buying in at the right price.
- These same institutional investors are not in a hurry to see price appreciation. Their primary concern is share of control.
- They will buy slowly – inconspicuously – to keep the price from appreciating while they build their stakes (usual tricks of multiple wallets, obfuscating with occasional sells).
- At some point the markets will cotton on to the game and the late-comers will rush to grab what share of the BTC supply remains to be traded. It could be six months, a year, two years, whatever. They are not in a rush.
- They will use those BTC as collateral (just like gold) for low-cost borrowing of fiat for expansion and payouts to customers.
This person's advice to me was simple: watch the price fall until the network starts to show signs of 'weakening'. When this happens, expect a period of price stabilization: low volume trading within a narrowing price range, with minor upward movement in the price trend as required to keep the miners (and their vendors) healthy and the ecosystem growing. It seemed pretty clear that retail use of BTC for payments wasn't on the radar, and the biggest threat they see is from central banks that are in the process of doing the very same thing for the same reason.
Note that this is not advice, nor evidence of anything and I don't know any more than I am sharing here, although I would be pleased to see a debate and discussion. It made a lot of sense to me and I thought some of you might agree.