Why Large Banks are Increasingly Using Bitcoin (BTC)

Key takeaways

• Initially viewed with skepticism and associated with illicit activities, Bitcoin is evolving as a legitimate asset class through the development of regulatory frameworks and high-profile institutional endorsements.

• With regulatory acceptance, investors have more confidence in Bitcoin’s staying power.

• Major financial institutions like JPMorgan, Fidelity, and PayPal have started offering Bitcoin services, while corporations like Tesla and MicroStrategy have added Bitcoin to their balance sheets.

Bitcoin 101

A cryptocurrency is a digital or virtual form of currency that uses cryptographic techniques for security. Unlike traditional currencies issued by governments (like the dollar or euro), cryptocurrencies are decentralized, meaning they operate on technology that eliminates the need for intermediaries, such as banks or payment processors.

The largest cryptocurrency by market capitalization (the total value of all its coins in circulation), is Bitcoin. It is a decentralized digital currency that enables peer-to-peer transactions without the need for an intermediary, such as a bank or government.

Created in 2009 by an anonymous person (or group) under the pseudonym Satoshi Nakamoto, Bitcoin was the first cryptocurrency, pioneering the use of blockchain technology to facilitate secure, transparent, and immutable transactions. Since its inception, Bitcoin has maintained its position as the most valuable and widely recognized cryptocurrency in the world.

Bitcoin's Origins and Satoshi Nakamoto

Bitcoin’s origins are rooted in the work of an anonymous creator or group known as Satoshi Nakamoto, who introduced Bitcoin in a 2008 whitepaper titled, "Bitcoin: A Peer-to-Peer Electronic Cash System." It outlined a decentralized, peer-to-peer digital cash system that could operate without a central authority (such as a bank or government).

Satoshi’s vision addressed problems with traditional finance, especially double-spending (the risk of spending the same digital currency twice). By using a public, decentralized ledger (the blockchain), Bitcoin solved this issue without requiring a central authority.

Satoshi's identity remains unknown to this day, but their vision and creation have reshaped finance, technology, digital assets, and some have said the Bitcoin app and/or software.

Changing Perceptions of Bitcoin

Initially, Bitcoin was viewed with skepticism and associated with illicit activities. However with regulatory frameworks developing and high-profile endorsements emerging, Bitcoin is seen as a legitimate asset class. It's also perceived as a tool for financial sovereignty, offering an alternative to traditional financial systems, especially in regions with unstable currencies or restrictive banking practices.

Major financial institutions and corporations have started to invest in Bitcoin, further legitimizing it. This shift comes from the potential for high returns and portfolio diversification.

Advances in Bitcoin’s technology, such as the development of the Lightning Network, have significantly improved its scalability and transaction speed, making Bitcoin more practical and efficient for everyday use.

Bitcoin has had a profound cultural impact, sparking public discourse on privacy, decentralization, and the future of money. It has emerged as a symbol of innovation and financial independence.

Evolution of Popular Opinion and Adoption of Bitcoin

The evolution of popular opinion and adoption of Bitcoin has been a journey from skepticism to increasing acceptance, driven by various economic, technological, and cultural shifts. It can divided into a few chapters.

(2009 to 2012)

Initially, Bitcoin was largely unknown outside small groups of cryptographers, developers, and tech enthusiasts. Early adopters were drawn to its decentralized nature and the idea of a currency free from government control.

(2013 - 2015)

As Bitcoin began to enter the mainstream, it was often associated with skepticism due to its association with the Silk Road and other illicit online activities. Many traditional finance experts dismissed it as a speculative bubble; however, it underwent modest growth, with a few online merchants and tech-savvy businesses accepting it as payment. During this period, cryptocurrency exchanges and wallets started emerging, making it easier for individuals to buy, hold, and trade Bitcoin and view dynamic Bitcoin price.

(2016-2017)

Bitcoin’s 2017 price surge captivated the public and media, sparking a wave of new investors. Bitcoin began to be seen as a potential digital asset or “digital gold,” rather than just an alternative currency. Cryptocurrency exchanges gained popularity, and Bitcoin ATMs began appearing in cities worldwide.

(2018 - 2019)

Following its 2017 crash, there was skepticism about Bitcoin’s long-term viability. However, some began to appreciate Bitcoin’s resilience and potential as a hedge against inflation and financial instability. Bitcoin use cases expanded, with some seeing it as a store of value and others exploring blockchain applications in finance.

(2020-2022)

The COVID-19 pandemic and resulting economic uncertainty led to a new view of Bitcoin as a hedge against inflation. Institutional investors and corporations began entering the Bitcoin market, adding legitimacy to the asset. Major financial institutions like JPMorgan, Fidelity, and PayPal started offering Bitcoin services, while corporations like Tesla and MicroStrategy added Bitcoin to their balance sheets.

Today, Bitcoin is increasingly seen as a viable asset class, though opinions remain divided, especially regarding environmental and regulatory concerns. Some view it as an essential part of the future financial ecosystem, while others remain cautious about its volatility. However, regulatory scrutiny has increased, with governments worldwide seeking to address concerns about consumer protection, taxation, and environmental impact.

Here's some recent Bitcoin statistics from Bankrate and additional sources:

• Millennials own Bitcoin: 26 percent vs 14 percent of all U.S. adults.

• As of 2023, about 17 percent of American adults have owned cryptocurrency

• In the United States, high-income earners are crypto investors, with those making $100,000 or more annually representing 25 percent of crypto owners vs 15 percent of the general public.

• About 70 percent of cryptocurrency owners are men (they represent only 48 percent of the general population) while women comprise 30 percent of crypto owners (52 percent of the general population).

Why Bitcoin Became the "Mainstream" Cryptocurrency

Bitcoin became the "mainstream" cryptocurrency for several reasons, primarily due to its first-mover advantage, strong security model, decentralized nature, and the development of a compelling narrative as “digital gold.” Bitcoin’s supply is capped at 21 million coins, which has contributed to its perception as a deflationary asset—similar to gold. This fixed supply is designed to resist inflation, adding to its appeal as a hedge against currency devaluation and economic uncertainty.

Bitcoin’s adoption by major financial institutions, companies, and even governments helped cement its mainstream status. Notable examples include MicroStrategy, Tesla, and Square, all of which have added Bitcoin to their balance sheets as a reserve asset while payment processors like PayPal, Square, and Visa began offering Bitcoin services, allowing users to buy, sell, and even spend Bitcoin on everyday purchases. This integration has made Bitcoin more accessible and practical for retail investors.

Bitcoin’s appeal among public figures like Elon Musk and Jack Dorsey has amplified its visibility, helping drive public interest and lending social validation to its adoption. With its meteoric price increases, especially during its bull runs, Bitcoin garnered significant media attention, further increasing public awareness and interest.

Bitcoin’s regulatory recognition has grown as governments around the world develop frameworks to govern its use, making it easier for institutions to invest and hold Bitcoin. While regulations vary, many countries have provided legal clarity, allowing Bitcoin to be treated as property, a commodity, or even legal tender (e.g., El Salvador). With regulatory acceptance, it has given investors more confidence in Bitcoin’s staying power, as clearer regulations signal that Bitcoin is here to stay.

History of Big Banks & Bitcoin and their changing attitudes

When Bitcoin launched in 2009, banks largely ignored it, dismissing it as an experiment with limited implications. At this stage, Bitcoin was mostly associated with small online communities and a decentralized ethos that conflicted with traditional banking. Prominent bankers were generally dismissive of Bitcoin, viewing it as a speculative hobbyist project that lacked the characteristics of “real money.”

Bitcoin’s growth and association with the Silk Road and other illicit activities drew negative attention from banks, who saw it as a potential conduit for money laundering and illegal transactions. Bank leaders and policymakers warned customers about the dangers of Bitcoin, highlighting its use in illicit markets. Many banks refused to process Bitcoin-related transactions or offer services to crypto companies and some began to lobby for stronger regulatory oversight of Bitcoin.

Beginning in 2015, skepticism toward Bitcoin as a currency remained high, but banks began exploring the potential of blockchain technology to improve efficiency, transparency, and security in financial transactions. Banks like JPMorgan, Goldman Sachs, and others began developing their own blockchain-based projects and private ledgers, focusing on cross-border payments, settlement times, and trade finance.

Institutional interest started growing in 2018, with banks such as Goldman Sachs and Morgan Stanley starting to offer Bitcoin futures and cryptocurrency trading desks to meet growing client demand, although many restricted these services to institutional clients. Several banks began publishing research on Bitcoin’s potential, investigating its appeal as a store of value and inflation hedge.

During the pandemic, major financial players, including JPMorgan and Citigroup, began to publicly embrace Bitcoin as a legitimate investment option. Banks also started providing crypto services, such as Bitcoin custody, trading, and investment products, for both institutional and high-net-worth clients. Firms like Fidelity launched digital assets while JPMorgan offered Bitcoin exposure to its wealth management clients.

CEOs of major banks, including JPMorgan’s Jamie Dimon and Goldman Sachs’ David Solomon, softened their stance on Bitcoin, even if they remained cautious. Dimon, a vocal critic, allowed JPMorgan to create products to meet client demand for cryptocurrency exposure.

Beginning in 2022 as adoption grew, banks started collaborating with regulators to ensure compliance and mitigate risks associated with cryptocurrency. Many banks now operate in regulated jurisdictions, emphasizing transparency and consumer protection.

They have also formed partnerships with cryptocurrency exchanges and custodial firms to leverage their expertise and improve offerings for clients interested in digital assets. For instance, Goldman Sachs collaborated with digital asset platform Galaxy Digital to offer Bitcoin futures trading. Major banks are also now actively participating in regulatory discussions, emphasizing the need for clear frameworks to safely manage Bitcoin and other digital assets.

Potential Benefits of Institutional Bitcoin Acceptance

Increased legitimacy and trust: Institutional acceptance lends credibility to Bitcoin, as involvement by established financial players often signals safety and legitimacy to the broader market.

Enhanced market stability: Institutions typically make long-term investments, which can bring stability to Bitcoin’s historically volatile market.

Increased liquidity: Institutional involvement means greater trading volumes, as banks, asset managers, and funds enter the Bitcoin market, with higher liquidity benefitting all market participants.

Broader accessibility and infrastructure development: Institutions investing in Bitcoin often develop infrastructure such as custodial services, trading platforms, and payment systems, making Bitcoin more accessible to retail investors and companies.

Diversification for institutional portfolios: As a decentralized asset, Bitcoin is not directly correlated with traditional asset classes like stocks and bonds, making it a valuable diversification tool.

Stimulus for innovation in digital asset technology: Institutional involvement can encourage innovation within the cryptocurrency space, as banks and funds may invest in research, development, and product improvements.

Potential Drawbacks of Institutional Bitcoin Acceptance

Increased regulatory scrutiny: As institutions adopt Bitcoin, governments and regulators are likely to impose stricter regulations to ensure compliance, transparency, and consumer protection.

Market volatility amplification: Institutional investors often deal in large volumes, which could amplify Bitcoin’s inherent volatility if they buy or sell significant holdings in a short timeframe.

Concentration of Bitcoin ownership: Institutional adoption may lead to a concentration of Bitcoin ownership among a small number of large entities, reducing the decentralized nature of Bitcoin.

Environmental concerns: Institutional investment may attract more attention to Bitcoin’s environmental impact due to the energy-intensive nature of its proof-of-work mining.

Cybersecurity risks: As institutional adoption increases, so does the incentive for hackers to target Bitcoin infrastructure, especially as institutions hold large amounts in custodial services.

Is Bitcoin a Threat to Centralized Finance?

Bitcoin and other cryptocurrencies do pose challenges to centralized finance, but whether they are a direct threat is a complex question. Some challenges include decentralization as Bitcoin operates on a decentralized network, meaning it doesn’t rely on central banks or financial institutions to validate transactions. This can weaken the traditional financial system's ability to control the money supply and implement monetary policy; the rise of cryptocurrencies can introduce volatility and financial stability risks.

Governments and financial authorities are concerned about the lack of oversight and the potential for cryptocurrencies to be used in illegal activities. This can reduce the traditional financial system's capacity to regulate the money supply and execute monetary policy effectively.

On the other hand, Blockchain technology and cryptocurrencies present innovative approaches to financial transactions, with the potential to lower costs and enhance efficiency. Cryptocurrencies can deliver financial services to unbanked populations, enabling them to engage in the global economy without relying on traditional banking infrastructure.

Big Bitcoin Supporters in Finance

Michael Saylor (CEO of MicroStrategy): A a vocal advocate for Bitcoin, Saylor is leading his company to invest billions in Bitcoin as a primary treasury reserve asset.

Paul Tudor Jones (Hedge fund manager and founder of Tudor Investment Corp): Jones is known for his endorsement of Bitcoin as a hedge against inflation.

Jack Dorsey (Co-founder and former CEO of Twitter, CEO of Block, Inc. (formerly Square): Dorsey is a strong proponent of Bitcoin, viewing it as a revolutionary technology for the financial system.

Elon Musk (CEO of Tesla and SpaceX): Musk has expressed support for Bitcoin, and Tesla made headlines when it announced a significant purchase of Bitcoin and began accepting it as payment (though this was later paused due to environmental concerns).

Fidelity Investments (Investment firm): Fidelity has been a major institutional supporter of Bitcoin, offering custody services and investment products related to Bitcoin and cryptocurrencies.

JPMorgan Chase (Investment bank): Although initially skeptical, JPMorgan has started to embrace Bitcoin, recognizing its potential as an asset class.

Biggest Bitcoin Detractors in Finance

Warren Buffett (CEO of Berkshire Hathaway) and Charlie Munger (Vice Chairman of Berkshire Hathaway): Buffett famously referred to Bitcoin as "rat poison squared," arguing that it has no intrinsic value and that it is a speculative bubble. He believes that investing in productive assets is far superior to investing in non-productive assets like Bitcoin. Munger has echoed Buffett's sentiments, calling Bitcoin "disgusting" and a "noxious poison." He argues that it attracts criminal activity and that the speculative nature of Bitcoin makes it an unsafe investment.

Jamie Dimon CEO of JPMorgan Chase: Dimon has been a vocal critic of Bitcoin, calling it a fraud and expressing concerns about its potential for illicit activities. While JPMorgan has begun to offer Bitcoin-related services, Dimon has maintained his skepticism about the cryptocurrency.

Larry Fink (CEO of BlackRock): Fink has expressed skepticism about Bitcoin, stating that it is primarily an asset for speculative trading rather than a legitimate investment vehicle.

Mark Cuban (Entrepreneur and investor): While Cuban has invested in cryptocurrencies and acknowledges their potential, he has also expressed concerns about Bitcoin’s scalability and the challenges it faces in becoming a widely accepted form of currency.

Hank Paulson (Former U.S. Treasury Secretary): Paulson has warned against investing in Bitcoin, labeling it a speculative bubble that is susceptible to collapse and has expressed concerns about its use in money laundering and other illegal activities.

Janet Yellen (U.S. Secretary of the Treasury): Yellen has raised concerns about Bitcoin’s potential for facilitating illegal activities, such as money laundering and terrorist financing and the risks associated with cryptocurrencies.

Conclusion

Today, Bitcoin and its relationship with institutions reflects a dynamic landscape characterized by increasing acceptance, evolving regulatory frameworks, and ongoing challenges. More institutional investors, including hedge funds, asset managers, and publicly traded companies, are adding Bitcoin to their portfolios and investing in educational initiative. However, Bitcoin is not without volatility risks as well as regulatory scrutiny and cybersecurity risks.

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