- With the increase in popularity of global cryptocurrency markets, more and more institutional investors are stepping forward to learn and integrate blockchain technology with their firms to improve financial management.
- Institutional investments must play their part in sustaining the cryptocurrency industry. Bodies like the Grayscale Bitcoin Trust offer services and guidance to investors interested in the crypto market.
The concept of a cryptocurrency or digital assets emerged in 2009 after Satoshi Nakamoto‘s renowned Bitcoin whitepaper was published to the public. Blockchain technology has since revolutionized the global financial services market, changing people’s perspective on monetary transactions and opening a world of possibilities through the complete digitization of our economies.
Governments and regulators worldwide are looking into the potential benefits of cryptocurrencies and blockchain technology, like user autonomy and transactional security. Some countries, most notably China, have even announced the launch of their own national state-backed stablecoins.
It’s not unrealistic to say the next few years will push digital assets into the mainstream from sheer growth metrics alone. Still, despite growing interest in the technology from retail investors, institutions have only just started to pay attention.
So far, institutional investors have mostly shown reluctance to accept cryptocurrency as a permissible asset class, but now with the rapid onset of technological advancements and digital tools to better equip the crypto market, even the firmest critics are loosening their stance.
Institutional Investors are Reluctant to Accept Crypto
Globally, a whopping 78% of investors admit that their firms will most likely not trade in cryptocurrency soon. Experts attribute this to two main reasons: government regulation and a lack of robust infrastructure.
Governments regulate the crypto market quite harshly in most countries, with every transaction tested against various trading rules, defeating cryptocurrency’s central purpose: autonomy. This constant vigilance from governments, combined with the volatility and risk involved in a decentralized ledger’s token, has most institutional investors on the fence.
Further, since the space is still in its infancy, much of the infrastructure required for institutional entrances are still under development. Large investments move more during price swings, and without enough ways to efficiently invest large sums of money into crypto, institutional investors are never going to seriously test the waters. Recent technological advancements have made progress on this front, and blockchain networks, in general, have become more efficient, secure, and accessible than ever before.
Is Gold a Better Investment Than Bitcoin?
Bitcoin is often referred to as ‘digital gold’ because of its similar, if not improved, properties as both a medium of exchange and a store of value. Gold has been one of the most reliable appreciating assets for thousands of years, and with its relatively lower volatility compared to cryptocurrencies, investors are far more likely to choose the physical commodity. Further, gold is much more widely accessible to people of all economic backgrounds and is also immune to competition risk.
Check out our full comparisons between Gold and Bitcoin
However, comparing the two markets’ potential future values is just as futile as trying to convince a gold bug to invest in Bitcoin. Conventional investor bases will always prefer gold, but it’s hard to rule out the powerful advantages of holding digital currency.
Unlike gold, cryptocurrencies are far more easily transferable and can be sold almost immediately for their true value. Large retailers often accept cryptocurrency as a legitimate form of payment, and this freedom to use digital money as regular currency is absent with gold.
Additionally, gold is a more long-term investment, bringing small but predictable gains over years of investment. With crypto, however, even short-term investments can produce high returns in the right situations. While it might seem like gold would have a more predictable supply schedule, Bitcoin’s programmed halving events ensure a more stable supply, and cryptocurrencies also offer a more dynamic investment selection of assets to choose from.
So…Are Institutional Investors Buying Bitcoin?
The short answer: Yes.
With the increase in popularity of global cryptocurrency markets, more and more institutional investors are stepping forward to learn and integrate blockchain technology with their firms to improve financial management. It is expected that blockchain’s global market will grow to $23.3 billion by 2023, and investors across the globe have started to welcome this new concept into their operations. In fact, as much as 72% of investors surveyed by Fidelity Investments said they were willing to invest in products representing digital assets.
In 2020, blockchain brought a myriad of innovative solutions to the financial services industry, enabling large market-capitalization companies to multiply their assets much quicker than otherwise would have been possible. Institutional firms have also begun investing in custodial services, advanced cryptocurrency tools, and live data collection modules.
Additionally, the CBOE Global Markets and the CME Group played a huge role in involving institutional investors with cryptocurrencies. Owing to their efforts, the total Bitcoin currency (BTC) contracts shot up from 538 in December 2017 to nearly 6000 in February 2020. However, the global pandemic that erupted last year wreaked havoc on all kinds of financial markets. From international trade markets to national economies, the COVID-19 pandemic brought about a sudden boom in liquidations, causing extremely low stability levels and high volatility compared to the equity market.
The downside risk of a portfolio including Bitcoin with an S&P500 index increased significantly, making it evident that Bitcoin could not serve as a safe haven during times of global market turbulence.
However, as lockdowns in different countries extended and economies began to slow down, additional government-imposed restrictions on different fiscal policies opened many doors for institutional investors to invest in non-traditional assets like blockchain-based tokens. Theoretically, blockchain has the potential to overcome several problems faced by global markets while also providing benefits like serving as a financial hedge and money transfer tool.
Another major breakthrough during the pandemic was the Bakkt Bitcoin Monthly Futures, a platform to trade physically settled Bitcoin monthly derivatives contracts. The volume of these trades reached an all-time high of $45.56 million, attracting the attention of institutional investors from the world over. With the increased acceptance of crypto trading among reputable institutions, players from other investment markets have also started to consider dealing with digital currencies.
Putting the ‘Fun’ in Fund
The most obvious reason to invest in cryptocurrency is the high returns on investment, even over short periods. However, this isn’t the only thing that sets cryptocurrencies apart. Investors are now much more comfortable with the crypto market, and with the power of autonomy over the funds, they can access their money any time they want without having to rely upon intermediate bodies like banks to handle transactions.
This also saves on exorbitant banking fees, and in the long run, a decentralized economy will bring more power and control over funds to both institutional and individual investors. That being said, institutional investors are especially important to the blockchain space and play a massive role in this industry’s sustainability. With an increase in the number of such market players, norms around accountability and due diligence are likely to become more stringent.
One of the biggest issues in blockchain is the poor custodianship for the safekeeping of funds. This causes an increased risk of fund misappropriation, theft, or even fraudulent transactions. In 2019 alone, cybercriminals managed to hack several accounts, stealing cryptocurrency worth $4 million.
This is where institutional investors could help. With their clean transaction records and respectable reputation, there is hope that there will be more transparency of trading volume, higher security of transactions, and increased profit-making power of the investors.
How Institutional Investors Will Impact Crypto
Institutional investments must play their part in sustaining the cryptocurrency industry. Bodies like the Grayscale Bitcoin Trust offer services and guidance to investors interested in the crypto market, making it easier to explore the various areas under the digital asset domain.
Grayscale also provides advanced investment products to facilitate integration with the “Internet of Money” and researches the outlook of digital assets with a focus on cryptocurrency inclusion in the investor portfolios. As an investor, it’s paramount to have a strong understanding of large-cap blockchains like Ethereum, Bitcoin, Litecoin, Binance Coin, Polkadot, Chainlink, and how each impacts the global market in different ways.
There are five ways to invest in the crypto market, each largely categorized based on how much an investor is willing to risk. Just like how traditional investors would reserve large stocks of gold in the hopes it would appreciate, cryptocurrency investors‘ HODL’ Bitcoin.
However, projects looking to launch their own token can also crowdfund their product, service, or platform and sell tokens in an ICO to build the platform later. This is akin to when a company goes public, except there are usually no existing financial statements to go off of, the actual utility of the asset may not be as functional as expected, and the people behind the project can be anonymous.
With so many entrepreneurs entering the space with prototypes of products using upcoming technologies, there are many projects that directly approach angel investors to kick-start the business. However, with how fast-paced the blockchain industry is, the systems of today don’t necessarily dictate how things will eventually play out. No matter how many institutional investors pour funding into developing the technology, no amount of money can always accurately predict the future.
While there are some great advantages to investing in cryptocurrencies, it’s necessary to understand their drawbacks as well. Institutional investment could fast-track the development of everything blockchain has to offer, but the fear of it turning into a centralized system controlled by a monopoly of institutional investors is real and could slowly become a reality.
The rising popularity and scope of digital currencies are luring in the big tech companies to invest in the platform. However, with most Internet activity being actively monitored and content being selectively censored by government bodies, there is a strengthening opinion that institutions will eventually take over these platforms completely.
They also argue that institutional involvement in cryptocurrency markets will lead to market manipulation by cash-rich investors, taking the freedom of making profits away from other small-scale investors. Moreover, the cryptocurrency ecosystem is not yet mature enough to accommodate institutional investors.
Disparate government restrictions across different parts of the world and the lack of proper infrastructure for dealing with the crypto market make the regulatory status of cryptocurrencies questionable. From issues like immunity and hacking to investor protection frameworks and transactional transparency, blockchain addresses a wide range of problems for the financial services industry as a whole. But the high price volatility and low consumer confidence of digital assets have yet to be approached on a deep level.
The crypto market has been riding a rollercoaster since day one, and as with any market or industry, it comes with its own pros and cons. It’s safe to say institutional investment in crypto markets will increase with time, and blockchain technology will become more widely accepted by investors and governments to generate exponentially higher income.
Paul Tudor Jones, Founder and Chief Executive at Tudor Investment Corporation, is considered one of the most successful macroeconomic traders ever. He revealed in 2020 that he invested 2% of his total assets in blockchain-based tokens and that he considers Bitcoin to be a major part of a far-reached profit maximization strategy. He also compared Bitcoin to other traditional stores of value like gold or US dollars and claimed to prefer cryptocurrencies over them due to their diminishing purchasing powers over time.
Considering the steadily growing demand for cryptocurrencies, large institutions and independent investors will not hold back for long. The few institutional investors already trading in crypto markets are gaining confidence in the world of digital finance, and thanks to the constantly improving systems over the years, it’s only becoming easier to attract investors to try their hand at it.