Institutional Investment in Cryptocurrency

The cryptocurrency industry has finally caught the interest of major financial institutions. In 2020, when several asset classes outperformed the finance sector’s expectations, cryptocurrencies lived up to the hype and stood out. While it took time for institutional investors to jump on the digital currency bandwagon, the crypto world was all open arms in welcoming another positive sign of recognition.

The demand in cryptocurrency has been steadily surging, with more institutional investors starting to buy cryptocurrency. Those who were already in the market are increasing their purchases. The amplified interest came despite the crypto industry’s recent downturn, when the total crypto market capitalization fell to a low of $1.75 trillion on September 20. Major cryptocurrencies, including Bitcoin and Ethereum, hit the red mark following controversy surrounding China’s Evergrande Group’s debt problems. The real estate crisis was large enough that it forced investors to start a sell-off of volatile assets. The United States’ potential cryptocurrency regulation also added to investors’ pressure.

However, cryptocurrency made a strong recovery, easing fears and satisfying those who questioned the asset’s potential. Now, the cryptocurrency market is seeing steady demand from mainstream financial institutions, with the btc to usd rate currently at 62,406.70 usd per bitcoin.

Increasing Crypto Purchases

Digital asset investment products recorded significant growth in inflows for institutional crypto investment products amounting to $95 million during the last week of September. At the forefront were the two leading cryptocurrencies, Bitcoin (BTC) and Ether (ETH). Bitcoin generated $50.2 million, while Ether made $28.9 million worth of inflows. Inflows to Bitcoin products increased 234% on average during the last 30 days.

In its financial report made with the U.S. Securities and Exchange Commission (SEC) on September 27, United States-based multinational investment bank Morgan Stanley has Grayscale Bitcoin Trust (GBTC) shares twice the amount it previously held.

On the other hand, Ark Invest, an American investment management firm in St. Petersburg, Florida, purchased over 450, 000 GBTC shares in two separate transactions. The company currently owns 8.3 million GBTC shares.

The New Crypto Participants

In an interview, Deribit’s chief commercial officer, Luuk Strijers, stated that big banks, such as Morgan Stanley, Citi, and Goldman Sachs, now offer their clients a diverse range of digital assets.

While being involved in offshore derivative markets is not on the bank’s agendas just yet, Strijers believes that active investing and trading, or alternatively hedging VC investments, can be considered a positive sign of their interest in cryptocurrency.

He said roughly 20% of Deribit’s options volume is now traded over-the-counter, up from the previous portion at 5% to 10%.

Meanwhile, in her observation, co-founder and CEO of Ethereum layer-two rollup platform Metis Elena Sinelnikova said that retail investors are only interested in the industry when huge quantities of coins are being purchased and the demand and coin prices are rising.

Sinelnikova noted that these institutional investors are not interested in periods of consolidation. However, she shared that investors take the decline or steadiness of the market as the perfect time to stack up.

As investors carry out this strategy, Sinelnikova said they should remember that different outcomes may result from the varying stages of the market. In determining whether BTC or altcoins (or both) drive the market’s next uptick, she said new crypto participants should look at Bitcoin dominance statistics.

The institutional investor’s interest in cryptocurrency inevitably brought a lot of questions and doubts from the financial sector, with some expecting them to stay just a short time. However, c, chief architect of the scalability-focused blockchain network Telos believed that while institutional investors took some time in getting adjusted to the crypto industry, factors like volatility will not make them turn their backs on crypto anymore.

Horn noted that institutional investors work a lot differently from traditional crypto traders and investors and spend years evaluating and strategizing their crypto purchases. For this reason, they are less hesitant to accumulate cryptocurrency during downturns.

Horn believed that for these institutional investors to succeed in this new venture, they should follow the groundwork laid by firms who have already tested their hand in the industry like MicroStrategy.

According to Horn, the crypto industry will have more participants as newer mainstream investors complete their assessment of the cryptocurrency market.

Others are vigilant

With the U.S. on its course of regulating the cryptocurrency industry and the recent major financial crisis involving China’s Evergrande, there are still investors who choose to tiptoe around the idea of entering the digital currency market.

For Philip Gunwhy, chief marketing officer for NFT ecosystem Blockasset, it is impossible to predict when these new crypto participants would buy digital coins without these investors disclosing their purchasing patterns. He said these investors lack concerted effort in buying.

Gunwhy said many institutional investors opt for venture capital funding, which involves investing in firms that provide Bitcoin-related services.

Wes Levitt, head of strategy for Theta contradicted Gunwhy’s claims. Levitt said a steady institutional capital is coming into the blockchain market, with crypto venture capitalist (VC) funding exceeding $17 billion in the first half of 2021.

While Bitcoin and Ethereum’s crash in May reduced potential investor interest, Levitt reiterated the industry remained in the game despite exaggerated news of its downfall. He said there were reports showing September’s institutional flows that were still in net positive.

Bright Future

The cryptocurrency industry is seeing positive movements ahead. Joshua Frank, co-founder and CEO of the crypto and blockchain analytics provider TheTIE discussed the growing number of institutional participants in cryptocurrency investing and trading.

Frank saw hundreds of billion-dollar prop trading firms, hedge funds, and other asset managers were making their first crypto transactions. His company has clients belonging to the top 50–100 largest hedge funds currently forming crypto teams.

Meanwhile, a study conducted on traditional financial entities revealed more potential crypto participants. These entities lack prior experience in cryptocurrency trading but are planning to join the market in a year.

The report revealed the undeniable development in the crypto realm and the bright future awaiting the industry.