The German government has opened the floodgates to Bitcoin investment.

Following the implementation of a regulation passed earlier this year in Germany, up to €350 billion might enter the crypto market as early as this Thursday.

The new Fund Location Act (Fondsstandortgesetz) permits up to 20% of existing special funds (spezialfonds) and new special funds to invest in bitcoin and ethereum.

Previously, such funds were forbidden from devoting any part of their assets to cryptos, but now they can diversify into bitcoin with the estimated €1.87 trillion under their control.

They have the freedom to invest up to 20% of their income, and this regulation is an application of a European Union directive, implying that this new permissibility will be implemented across Europe.

“This won't happen immediately, but we're talking about Germany's largest investment vehicle — essentially all the money is in there,” said Sven Hildebrandt, CEO of Distributed Ledger Consulting (DLC), a proponent of the bill.

It has a broader and more general application because it is not crypto-specific, allowing principally pension and insurance funds to diversify by employing these spezialfonds. Blockchain Capital's Jacqueline Winter explains it this way:

“Spezialfonds are the German institutional fund vehicle of choice for the majority of liquid asset classes, as well as property within specific structures.

Under the umbrella of a so-called Master KVG structure, segmented Spezialfonds allow assets to be managed by several underlying managers with unified reporting.

The Master-KVG is a German-regulated investment management firm that is licenced under German investment legislation and is authorised and overseen by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdiensleistungsaufsicht, or "BaFin").

Some US pension fund managers frequently complained about being unable to invest in bitcoin in 2018, and hence desired an ETF because different criteria apply to stocks.

As far as we know, Germany is the only country that has removed this prohibition, but only for special funds that are not usually accessible to the public.

The limitation on public funding remains in place, despite Germany's Federal Association of Alternative Investments (BAI) requesting that it be lifted.

“It was critical for us to allow crypto investments, at the very least for Spezial-AIFs, in an increasingly digital economy. This must now be complemented by a revision in the UCITS directive (OGAW-Richtlinie) in the retail fund area, according to Frank Dornseifer, MD of BAI.

Bitcoin's current market capitalization is $678 billion, and while this rule allows for an influx of more than half of that, you'd expect any such diversification would be gradual. A steady, progressive intake, on the other hand, can have the same effect.

This is especially true in the face of negative interest rates, which have prompted Germans to flock to insurance policies with a still-low 2% annual interest rate.

Cryptocurrencies have significantly more potential rewards, but they are also far more volatile. Specialfonds, on the other hand, are typically long-term investments, and bitcoin's highly restricted 21 million supply should potentially yield decent annual returns on average in the long run.

As a result, a portion of this roughly two trillion will most likely be diverted to bitcoin, which has just obtained a new market that will open in two days.

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