The cryptocurrency industry was brimming with news of increased institutional investment at the start of 2021, and this remains largely true. Despite reports of increased outflows from institutional investors, net inflows remain extremely positive. Furthermore, while Bitcoin (BTC) appears to be the preferred investment for liquidations, institutional investment in Ethereum (ETH) has never been stronger.
Large-scale investors are flocking to the crypto train, from Wall Street hedge funds to major banks. Bitcoin’s drop from its all-time high of $65,000 raised concerns among cryptocurrency investors, but this may be changing as its price has begun to recover.
BTC accounts for more than 44% of the total $2 trillion digital asset market capitalization, while Ethereum accounts for around 18%. According to blockchain data analytics firm CoinMetrics, the number of addresses holding more than 1,000 BTC fell to around 2,100 in May from 2,500 in February. Most indicators, however, point to institutions increasing their overall holdings.
“There is no doubt that institutional investors have a long-term bullish approach to crypto, and Bitcoin in particular,” says Nikita Ovchinnik, chief business development officer of the decentralized platform 1inch Network. Long term, he also stated that the primary barrier for institutions would be the technology itself.
“Due to its architecture, DLT operates in a distinct manner that differs from traditional IT and financial product infrastructure. It would almost certainly necessitate some changes and updates in order to incorporate more entities into the crypto ecosystem.” He went on to say:
“The number of institutional investors with crypto exposure has increased dramatically in the last year, and they did not come for short-term gains.”
Over the last few months, international investment banks and financial services firms such as Morgan Stanley, BlackRock, Goldman Sachs, and JP Morgan have all launched Bitcoin-related services and funds. After reaching a high of $40 billion in April, the Grayscale Bitcoin Trust, one of the largest institutional investors in the space, reported that its total assets under management fell to $20 billion in July before rising to nearly $41 billion during the recent rally.
There are enough reasons for traditional investors to be hesitant to enter the market, including fears of a regulatory crackdown on digital asset exchanges and service providers, as well as China’s stance on Bitcoin trading and mining. However, the recent push above the psychological level of $40,000 may be a sign that sentiment is improving. The real question is what the institutions will do next.
ETH and the flow
The rising inflation rate of the US dollar has been one of the main reasons investors have flocked to Bitcoin over the last two years. In the midst of the ongoing COVID-19 crisis, the US Federal Reserve has printed trillions of dollars in the form of stimulus checks, prompting concerned investors to look for other places to park their money.
Bitcoin reported its sixth consecutive week of institutional outflows in mid-August, with over $22 million in liquidations in a single week. This is the digital asset’s longest period of outflows since 2018. Nonetheless, total assets under management for digital asset investment products increased 10% in the same week, owing primarily to price appreciation.
Multi-asset products, on the other hand, appear to be less uncertain in their direction, with institutional investors increasing their holdings by $7.5 million and attracting nearly $12 million in inflows over the last month. In comparison, Bitcoin funds have made nearly $68 million in profit during the same time period.
All of this suggests that institutions are diversifying their holdings beyond Bitcoin, with altcoins such as Ethereum, Cardano (ADA), and Binance Coin (BNB) seeing increased inflows. While Bitcoin outflows are higher than ever, institutional investments in digital assets are higher than ever this year.
“The undeniable pattern is that institutional interest and participation in the field continues to rise,” said Jack Tao, CEO of Phemex, a Singapore-based cryptocurrency exchange, in an interview with us, adding, “This is despite the periods of high volatility that crypto veterans are used to but may be undesirable to traditional investors.”
He also stated that the DeFi space is still in its early stages of adoption, and that while some technologies and applications are already in place, we are only seeing the tip of the iceberg. “Smart institutional investors can sense the change coming and want to position themselves squarely as beneficiaries for what’s to come,” he said, adding that “the final use cases that blockchain will address have yet to be imagined.”
Investing in digital assets as an institution is not the same as making a retail purchase. Despite the fact that the majority of crypto-positive institutions already trade on forex markets, they face risks that are distinct from traditional systems. Finding differences in spot prices can be an expensive ordeal, and because they are trading with unknown counterparties, factors such as technological reliability and liquidity depth are far more important than usual.
“We still have a long way to go,” said Daniel Santos, CEO of Woonkly Labs’ automated market maker, defi.finance, to us: “[Institutions] require not only regulated products, but also simple-to-use products tailored specifically to their needs.” He continued, saying:
“Institutions are looking for products that will allow them to invest in DeFi safely and with confidence. I believe they are taking a long-term view and are bullish.”
“DeFi is gaining traction,” said Yves Longchamp, head of research at SEBA Bank, a FINMA-licensed digital assets bank. According to Longchamp, institutional investors are focused on three main factors, including increasing yield in their portfolios — a source of revenue that does not exist in traditional finance.
Despite consistent Bitcoin outflows, institutions appear to be as bullish on digital assets as they have always been. TP ICAP, the global professional financial intermediary network, recently announced the launch of a cryptocurrency trading platform in collaboration with industry titans Standard Chartered and Fidelity Investments.
Though big money appears to be entering the industry with confidence, bringing capital into the space, price appreciation may take a back seat as regulation becomes a more prominent concern for institutional investors.
Intrigue within institutions
Cryptocurrency adoption is increasing faster than ever before, with previously less proactive markets seeing increased activity, while more actively participating regions deal with broader changes and regulatory issues.
According to Lennix Lai, director of financial markets at digital asset exchange OKEx, the main concerns are Anti-Money Laundering (AML) and tax evasion: “We see regulatory acceptance as a key obstacle to the market as a whole, yet market size and integrity are also challenges.” According to Ovchinnik, “the majority of protocols are completely permissionless, so there is always the possibility of becoming a counterparty to some kind of crime.”
However, he also stated that these issues are being worked out at the protocol level by development teams, who are taking preventative measures to ensure their regulatory approval in the long run. This could be a significant factor for institutional investors who are required to strictly adhere to regulations and the decisions of their governing political authorities when entering the space.
According to Huobi Trust’s chief operating officer, Robert Whitaker, institutions are pleased with Bitcoin and are beginning to develop market offerings around it. “Institutions are still accumulating a significant amount of BTC for their own needs and balance sheets,” he told us, adding that “this may easily drive the markets to sustain two to three trillion in valuation over the next year or so.”
With net positive inflows into digital assets, the possibilities for blockchain technology are limitless. The opportunities in this space appear to be limitless, and even the smallest ones can be extremely profitable. While Ocvhinnik believes institutions will place a greater emphasis on cross-chain Layer-one solutions, Tao believes there will be a greater emphasis on decentralizing traditional financial services and exploring more experimental aspects of the industry such as NFTs and GameFi.
According to Rachid Ajaja, CEO of AllianceBlock, a decentralized capital market, DeFi, offerings are expanding into more traditional structured products such as product wrapping and structured loans. “We are living in an exciting time,” he said, adding, “the shift towards DeFi is happening right now.”
The most difficult challenge will be striking a balance between the industry’s decentralization ethos and achieving the level of compliance desired by governments. For the time being, while the two forces appear to be fundamentally opposed, a more robust solution is likely to emerge soon as more lawmakers and government leaders educate themselves about cryptocurrencies and the technology behind them.
“Regulation in digital assets is a net positive,” said Julian Sawyer, CEO of Bitstamp exchange, in an interview with us, adding: “By separating good actors from bad actors, building more trust with investors, and holding companies accountable for their actions through clearer guidelines, regulatory interest means credibility and growth for the entire industry.”