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Bitcoin is slowly becoming more accepted in institutional circles as a long-term investment. For example, Ark Investment believes that bitcoin will rise substantially from here. Other institutional investors are “piling” into bitcoin.

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In part 2 of its interesting white paper, “Bitcoin As An Investment,” Ark describes its expected rise. It will “scale from roughly $200 billion today to $1-5 trillion network capitalization during the next five to 10 years.”

Ark Investment’s Estimates

That white paper was written on Sept. 17, but bitcoin has indeed risen significantly since then. At the time, bitcoin was at $10,000 per bitcoin, but now it’s more than $31,000. In other words, it has tripled in three months.

This effectively puts bitcoin’s market capitalization more than $660 billion or so. That is because on Sept. 1 Ark Investment estimated that at $10,000 the market cap was $220 billion.

Moreover, on page 6 of Part 2 of Ark’s white paper, it predicts that bitcoin will reach a $3 trillion market cap by 2025. Three trillion is the same as a $3,000 billion market cap. Therefore, this represents almost 5x times its present market cap over the next five years.

This works out to an effective average gain of 36.3 annually over the next five years. For example, if bitcoin were to gain 36.3% each year, and compound growth averages this amount, then bitcoin will be equal to 4.7x its present price, or $3 trillion.

To put it simply, making 36% annually for five years would be an astounding return for most institutions. This is the gist of why institutional investors are now starting to take a look at bitcoin as a long-term investment.

Risks Associated With Bitcoin

There are two major reasons why institutions have held back from jumping wholeheartedly into bitcoin. The first is variance. It is no secret that bitcoin has had large gains and losses over the roughly 10 years that it has been around.

Institutions don’t like to see large amounts of variance. Often, for example, they measure their returns on a monthly basis. They would rather see lower gains than “downdrafts” in performance.

Just to give you an example, I was once approached by an institutional investor group to manage more than $100 million. However, the group gave me a requirement that they didn’t want to see greater than a 1% downdraft in any month. And on top of that they said I had to prove to them how I would manage this from happening.

Of course, as a long-term value investor, I have no problem with variance. Especially if I understand the underlying value or fundamental value of the investment. I see “downdrafts” as a chance to buy a selected investment at a cheaper price. It is on sale then.

But institutional investors don’t like this. Needless to say, I declined that institutional investor’s offer. I later worked for a hedge fund that had a more liberal attitude. It had me sign a contract that effectively said I would not allow any particular investment to decline in value by more than 12%.

Although that never happened with my account (I made them over 50% that year), I cringe to think of how these investors would think of bitcoin as an investment.

So, for this reason, variance and the possibility of large downdrafts, many institutional investors have shied away from bitcoin.

Understanding Its Value

The second reason is that many institutional investors don’t understand bitcoin’s inherent value. They have a hard time seeing it as a viable investment class.

To most of them, it falls into the same investment class as gold and foreign exchange (as an investment). For example, the Motley Fool recently published an article, “4 Reasons Warren Buffett Can’t Stomach Bitcoin.”

These kinds of institutional investors consider it nothing more than a speculative gamble. Defensive investors never gamble. They see no inherent reason why bitcoin should rise, other than it is rising. Therefore, to them, whether or not bitcoin becomes a long-term investment success is irrelevant.

These investors would rather put their money into investments that they understand and can predict their inherent, underlying value.

Therefore, some investors will follow Ark Investment’s philosophy and make long-term investments in bitcoin. More conservative investors will stick to what they know and in which they have made money.

On the date of publication, Mark R. Hake did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Mark Hake runs the Total Yield Value Guide which you can review here.