• Bitcoin (BTC) has more than doubled this year and is now around $7,800, nearing the $9,000 level observed at the start of May. Its market capitalization is now around $275 billion — roughly the size of a small, developed country’s stock market.
  • Bitcoin’s audience has widened from late 2017, when there was a large inflow of Japanese participants. According to Fidelity’s survey, institutional investors seem to be interested in the currency due to its low correlation with other asset classes. There have also been inflows from countries that are politically and economically vulnerable.
  • The legal term “virtual currency” was changed to “cryptographic asset” in Japan. A bill calling for a strict storage method was passed by the House of Representatives, which stabilized Tokyo’s regulations. Although the upper price ceiling has become quite heavy, Bitcoin still has the potential to reach $9,000. Key variables include the positive impact of higher trading volume, Facebook’s (FB) plan to issue their own currency, the launch of a virtual-currency app for Amazon.com (AMZN) and news about Fidelity starting a virtual currency service for institutional investors.

Transaction Growth Supports the Virtual Currency Market

The BTC market has been trending well since April. It briefly hit $9,000 and has now pulled back to about $7,800. (Chart 1). BTC started the year around $3,700.

The overall market capitalization of the virtual currency market had fallen sharply but has now rebounded. Although its valuation is well below that of equity markets like Japan’s, it’s comparable to smaller small developed countries such as Denmark and Singapore (Chart 2).

New Participants Seem to Have Entered the Market Since 2017

Trading has gradually recovered since January along with the price increases. Weekly volume is only about half of the level from the period in late 2017 and early 2018. But it’s currently similar to that of TSE (Chart 3-1). In addition, the trading volume of unique accounts has recovered to 70 percent of the peak level (Chart 3-2).

These seem to indicate that there is a wider range of participants than at the end of 2017.

The question is what types of buyers and sellers are entering. The ratio of Japanese yen in the mix has dropped significantly, while investment from the U.S. is significant. We’ve also seen more activity from investors in countries with political risk or high inflation. (See charts 4-1, 4-2). It appears that individuals and businesses needing to import foreign goods are using BTC as a hedge against their own currencies.

Although no concrete movements have been seen yet, the U.S. is also hoping for the participation of institutional investors moving forward. According to a survey by Fidelity, the country’s biggest asset manager firm, institutional investors seem interested in virtual currencies due to their low correlation with other assets (Chart 5).

Favorable Conditions May Lift Bitcoin to $9,000

On May 21, a bill reforming the Act on Settlement and Financial Instruments and Exchange Act related to virtual currency passed Japan’s House of Representatives. Here are the main changes:

  • Virtual currency was renamed as “cryptographic asset.”
  • In principle, virtual currency must now be stored in a cold wallet (a matching asset must be maintained in respect to currencies in a hot wallet).
  • An Initial Coin Offering (ICO) token granted with the right to receive revenue sharing, is now regarded as a “security.”

These will be implemented as early as this month.

It should be noted that these changes are not about reducing the trades, but focus on ensuring the safety of customers. The said reform will surely stabilize Japanese regulations on Bitcoin. The G20 summit is scheduled for June. And the possibility of a surprise that can negatively impact the market seems low because of the recent Japanese law and the fact no major fraud incidents have occurred recently.

Sentiment has also been bullish because of positives like FB’s plan to issue its own currency, the launch of an app that can make settlements on AMZN with virtual currencies and Fidelity’s plan to launch a virtual-currency service for institutional investors.

With the $9,000 level looming, BTC’s price action has gotten heavy. Still, activity will likely continue thanks to increased volume and the wider base of participants. Depending on the situation, there may be a breakout above $9,000 sooner rather than later. We haven’t seen that price since May 2018.

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Nana Otsuki is an Executive Director and Chief Analyst at Monex, Inc. She also serves as a Professor at Nagoya University of Commerce and Business, Postgraduate Program. Previously she has served as a Managing Director, Research Division, for both BofA Merrill Lynch and UBS Investment Bank, as well as held the title of Credit Analyst for S&P Global Ratings, Inc. She holds a Master of Business Administration degree from London Business School, and a Bachelor of Arts degree from the University of Tokyo. Otsuki is a member of the Advisory Board for Tokyo Metropolitan Government’s public fund, the Deposit Insurance for Agricultural banks committee, the Ministry of Finance’s Fiscal System Council Subcommittee, and NEXI Japan. She is an external independent board member of Credit Saison Co., Ltd., and external independent auditor of Tokio Marine Holdings.