Since inception, the Bitcoin & Crypto market has faced huge criticism from critics over the highly volatile nature of the price levels and also faced regulatory uncertainty in the majority of the jurisdictions because of their decentralised nature. In particular, the majority of the traditional investors slammed this digital assets market, as the trade price of digital assets surged rapidly many times in each bull cycle, which is a totally different thing in comparison to traditional financial markets.
Despite facing several challenges, this sector grabbed huge attention among institutional investors. Even large-scale players such as banks, hedge funds, pension funds, and insurance companies entered the crypto space with careful steps.The approval of spot ETF products for digital assets over the years in some of the top countries showed that this trend is surprising given the volatile nature of the market, but it highlights a shift in perception about the potential and resilience of the digital assets space.This type of situation for the crypto space among the big players is giving a big hint about the future of this sector, and if we can get these hints, then there are huge chances that it may help us to make further next-level investment decisions in cryptocurrencies.
Understanding Institutional Investment in Crypto
Top Institutional investors are those players who manage people’s public money for different types of funds, such as retirement funds, endowments, or private wealth.Historically, these institutional investors mainly focused on traditional asset classes like stocks, bonds, and real estate to invest money & get better returns.Bitcoin was born 16 years ago & after that, the rise of the crypto sector started as an alternative asset class. In the initial phase of Bitcoin’s inception, no institutional player recognized the Bitcoin sector as an alternative money market, but the Bitcoin market captured their attention, especially with crypto’s meteoric rise over the last decade.
Since the beginning, the majority of retail investors have been impressed by Cryptocurrency’s nature & features. The dominance of retail investors was very high over institutional investors in the initial phase of the inception of this sector, but now institutional players account for a growing share of trading volume and capital inflows. This shift has brought greater legitimacy and stability to the crypto space, even amid ongoing volatility.
Key Drivers Behind Institutional Interest
Many factors created peer pressure among institutional investors to jump into the crypto space. These factors acted as a catalyst to force institutional investors to increase interest in cryptocurrencies, even though these digital assets have been volatile, like earlier, in terms of price fluctuations.
1) Hedge Against Inflation
Between 2020 and 2023, the global economy shakes badly because of the COVID-19 pandemic & geopolitical tension which first started with the Russia vs Ukraine conflict. In this stressful economic downturn, the majority of the institutional investors were seeking alternative stores of value to fight against the increasing inflation.In this phase, Bitcoin emerged as the “digital gold” and Bitcoin enthusiasts promoted Bitcoin as a hedge against inflation, thanks to Bitcoin’s limited supply of 21 million BTC.Bitcoin advocates explained that Bitcoin is different from fiat currencies because the supply of fiat currencies can be increased in unlimited amounts, but here, Bitcoin is limited with its supply, thanks to the blockchain technology, which makes all Bitcoin’s transactional operations not only decentralised but also reliable with full transparency.
2) Portfolio Diversification
All institutional investors always try to increase the diversity of their money investment to reduce the investment risk in the worst scenario.During the global economic downturn, these big investors searched for more options to diversify their portfolios & they found Bitcoin as the best option.Many institutional-level experts noted that the impact on the prices of cryptocurrencies was not the same as the traditional assets money market, so if they can go with Cryptocurrency investment, then even when traditional markets underperform, cryptocurrencies may not necessarily follow the same trajectory, offering potential returns or at least stability at some level.
3) Technological Innovation and Blockchain Potential
Many experts belonging to institutional investors’ interest showed their inclination toward blockchain technology, beyond the volatile nature of cryptocurrencies. They noted that Crypto’s backend technology has a very big potential to revolutionize traditional money market industries.With the increasing inclination toward blockchain technology, many crypto projects started showing an inclination toward the practical world to use blockchain tools to manage the supply chain, healthcare and financial services. Such types of development made the blockchain sector a highly attractive area for investment.In particular, the Ethereum blockchain showcased many use cases with its smart contract functionality. Some top private banks jumped on the blockchain bandwagon to inject transformative changes into the traditional finance system. All this became a prime factor for institutional investors to allocate investment in crypto & blockchain startups & existing businesses.
4) Regulatory Clarity for Crypto Space
In the initial phase, it was very tough for the crypto space to evolve, as there was no rule & law for it, but the increasing retail investors’ inclination toward this sector forced the policymakers to think about this space also.After the entry of Tesla CEO Elon Musk, the world’s richest person in the Bitcoin world, many regulatory bodies began developing clearer regulations around cryptocurrencies, providing greater legal certainty for institutional investors.It is a bitter truth that the crypto sector is still evolving under unclear rules & laws, as this sector continuously evolves with new innovative ideas.Despite unclear rules & laws, this market has some rules that allow entrepreneurs to get started with new business ideas.If we talk about the regulatory challenges, then still the situation for institutional investors to allocate investment in the crypto sector is smooth in many top jurisdictions, e.g. The United States, Canada, and parts of Europe have made it easier for institutional investors to participate in this innovative market without fear of legal repercussions.
5) Development of Institutional-Grade Infrastructure
Because of a small push in the crypto-related investment activities among the institutional players, many top companies jumped to create a new business model to make money via providing easy-invest in crypto for institutional investors, such as custody solutions, derivatives markets, and crypto-focused funds.All these things made it very easy for institutions to allocate funds in cryptocurrencies. Platforms like Coinbase Custody, Fidelity Digital Assets, and Bakkt provide highly secured crypto assets storage and trading solutions focussed on institutional needs.
6) Mainstream Adoption by Corporations
High-profile corporations like electric car producer company Tesla, business intelligence firm MicroStrategy, and Block (formerly known as Square) have added Bitcoin to their reserve balance sheets, setting an example for other institutional investors.Such types of steps by these top corporations injected a better level of confidence among other top companies to consider investing in cryptocurrencies. Even the top executives of these companies played a vital role in promoting Bitcoin & explained to people in simple ways why investing in Bitcoin may be highly promising.
7) Addressing Volatility Concerns
Market volatility has historically been a very big reason for many institutional investors to not consider Cryptocurrencies as a better option to add to their portfolio. Because of the increasing investment & maturity of this innovative sector, the perception of price volatility risk is decreasing.
The majority of institutional investors, unlike retail investors, make decisions on behalf of sentiments instead of emotionally to short-term price swings. Many institutions noted the price volatility as an opportunity to get digital assets at discounted prices & hold them for better returns in the long term. In short, we can say that they see crypto price volatility as an opportunity to generate a faster return investment.
Notably the volatility in the crypto space reduced significantly over the last 2 years, as many spot ETF products have been approved by the United States Securities and Exchange Commission (SEC) in early 2024. And also BlackRock’s initial interest in Bitcoin in 2023 acted as a catalyst to create the bull sentiments around this innovative sector.
8) Increasing use of crypto & blockchain technology
However, the crypto space is still in that phase where it is facing huge challenges regarding the rules & laws, but still, the use of crypto & Blockchain technology is surging rapidly across the world among financial institutions at a high level.Some top private banks & fintech players worked on developing a token using blockchain technology, and some directly issued their tokens on crypto networks, without spending a high amount of charges or wasting money on development & maintenance.Top Blockchain firms like Tether & Ripple provided their crypto & Blockchain expertise to develop a centralised digital currency ( or, say, CBDC).
Conclusion
Increasing Institutional investor’s interest in the crypto space, driven by the need for diversification, hedging against inflation, and the super potential of blockchain technology & tools. Despite high volatility concerns in the crypto market, the maturity of this crypto ecosystem has increased steadily and also the development of institutional-grade infrastructure has made it easier to enter crypto investment activities for large-scale Institutional players. Increasing the number of institutions in the crypto market is likely to inject greater stability, credibility, and innovation, paving the way for widespread adoption in the financial world.
Read also: Pro-Bitcoin President-Elect Trump Faces Sentencing Before Taking Office: Will Bitcoin Prices Crash?
