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Crypto enthusiasts and the mass media talk a lot about how important it is for the big institutional investors to enter the market. If they invest hundreds of billions of dollars, the sector may skyrocket, with cryptocurrencies widely used all over the world. Experts predict that institutional investment may raise bitcoin price to over $ 50,000 and increase capitalization of the entire crypto market multifold. We’ve looked at how much money institutional investors have already invested in the crypto market, why they’re so important for the sector and when we could talk hundreds of billions and even trillions of dollars.
Who are institutional investors?
Institutional investors are companies trading and investing in securities. They’re big financial and brokerage firms, banks, pension and asset-managing investment funds and insurance companies.
Institutional players are among the most important actors of the traditional stock market. They account for up to half of the entire trading volume. They generally own the biggest stakes and exert a considerable influence on the market.
Crypto market has long been ready for the institutional players
In its early days, institutional players were apprehensive of entering the crypto market. It’s understandable since digital assets were an emerging and little-known instrument. Many thought all the coins would soon just vanish or would simply be banned by regulators. Unlike regular people, institutions cannot just buy bitcoin. Their activities are closely controlled by the state. They are to keep accounts and can only invest in legal assets, and they need their own infrastructure for trading. Eventually, the crypto market has come up with all of this.
What encouraged institutional players to turn their attention to the crypto market, after all? Let’s examine it more closely.
- High profitability. It’s the strongest and timeless reason. Profitability of the key instruments traditionally used by the institutional investors hardly exceeds inflation levels by 2–3 % per year. For instance, annualized return on the US Treasury securities is 0.1–1.4 %. In this context, institutional investors tend to turn their attention to the high-risk instruments: shares, corporate bonds and, now, cryptocurrencies.
- Emergence of regulatory framework and improved transparency. In most countries, regulators have no intention of banning cryptocurrencies. Their goal is stabilizing and legalizing the market. Their actions obviously demonstrate that they exert their best efforts in order to prevent cryptocurrencies from being seen as a bubble or a criminal tool. It has a great impact on the growth of institutional investments. Over the last few years, the crypto market has outgrown its shadowy reputation and has become officially recognized. Currently, the majority of the biggest crypto exchanges follow funds transfer and storage regulations and securities legislation. It boosts confidence of institutional investors — increasing market transparency together with regulator policies attracts big players to the market. As a result, they can plan and make both short-term and long-term investments for 5 or more years.
- Decreasing volatility. Big investors are not particularly interested in short-term speculations — they mostly buy cryptocurrencies for the long term. The more institutional funds are invested in the industry, the higher the liquidity and, accordingly, the lower the volatility (price fluctuations) is. Today, bitcoin is not as volatile as two or three years ago. Each big investment event makes the market more stable, thus attracting new players and encouraging them to invest more.
How institutional investors will change the crypto market
Now let’s discuss what institutional investors will do for the crypto market:
- “Coming-of-age” for the market. Arrival of institutional players to the crypto sector is the main sign of its “coming-of-age”. The market is becoming more mature, resurgent and developed.
- Massive-scale recognition of crypto market and bitcoin. Arrival of institutional players to the market makes bitcoin and all cryptocurrencies a more recognized tool for assets storage, investment and exchange.
- Price and capitalization growth. Many experts believe that institutional investors will provoke cryptocurrency price growth while bitcoin could become the key resource for investment. However, this growth will not necessarily be sharp. According to some, we shouldn’t expect skyrocketing prices — institutional funds will ensure slow and stable growth with no surges. Moreover, there’s virtually no limit for bitcoin growth. As calculated by the analytical firm Messari, if institutional investors invest as little as 1 % of their multi-trillion portfolios into the market, ВТС price could rise to $ 50,000. Traditionally, it will be followed by a rise in the price of other cryptocurrencies. Therefore, institutions could increase capitalization of the entire crypto market multi-fold — up to $ 1–2 trln. What if they invest a lot more rather than a mere 1 %?
- Protection against fall. Multi-billion investments by the big players could support cryptocurrency prices and market capitalization. Institutional investors could pump a significant amount of funds into the market, saturating its liquidity. It’ll help prevent falls similar to that of early 2018.
- Recognition of cryptocurrencies as means of diversification. As an asset, cryptocurrencies could become an excellent means of diversification to be used by investors in order to mitigate the risk of losing the funds invested. It’s further proven by the research by Jim Kyung-Soo Liew and Levar Hewlett on the optimal allocation to bitcoin in institutional portfolios. According to their estimates, the optimal allocation to BTC is 1.3%. This percentage diversifies risks and generates profit.
- Emergence of new centers of financial power. Entire jurisdictions — not only companies — fight for the big players. Thus, EU countries (Denmark, Switzerland, Estonia), Japan and Singapore attempt to surpass the US as the most attractive countries for crypto startups by adopting crypto-friendly legislation, promising regulative protection, streamlined business operations and low taxes.
- Emergence of reliable providers of crypto services. Fighting for the institutional funds, providers of financial crypto services reach levels worthy of institutional investors. Big exchanges and brokers provide them with the confidence they need.
Developing infrastructure for institutional investors
Cryptocurrencies are entering the conventional financial markets — slowly, but steadily. In the space of a few years, the industry has seen a boom of cryptocurrency hedge funds, launch of CBOE/CME futures, tokenization of assets, greater attention on the part of regulators, development of the “security tokens” concept (tokenized securities), exchange licensing, attempts to set up ETF funds for bitcoin and, most recently, emergence of specialized platforms for institutional investors and custodial services for them (asset storage and management).
Crypto projects are now strongly competing for attracting big investment from institutions. Crypto exchanges and startups try to outrace each other in creating a safe infrastructure customary for the financial system. Each company wants to lead at a time when big financial players enter the crypto market en masse.
Back in July 2018, the American exchange Coinbase launched Coinbase Custody — a service for storing crypto assets for institutional investors: leading cryptocurrency hedge funds, exchanges and ICO teams. It’s also promoting Coinbase Prime (credit and marginal products for qualified customers) and Coinbase Markets (a more advanced version of exchange). Similar products were later launched by other exchanges, such as Circle, Gemini and Bitfinex. Some Wall Street giants, for instance, Goldman Sachs, Blackrock and Morgan Stanley, intend to set up their own crypto services.
In November 2019, Intercontinental Exchange, an operator at the New York Stock Exchange, launched the Bakkt platform where big institutions can store cryptocurrencies and trade in physically delivered bitcoin futures.
In the end of the last year, Fidelity Investment’s crypto division launched its own exchange and custodial service.
In May 2020, the crypto custodian BitGo, one of the leading service providers for institutions, launched a fully-featured platform for institutional trading, with trading, crediting and crypto asset storage functions. The company strives to become the first prime broker on the crypto market — provider of liquidity ensuring access to the financial markets for brokers, funds and traders. The off-exchange trading service Genesis, the broker Bequant, the institution-facing liquidity aggregator FalconX, the crypto exchange Coinbase and other companies are also creating a prime brokerage service.
Notably, if in the past mostly US firms used to compete for the attention of institutional investors, since last year a lot of crypto custodians emerged in Europe where they are treated more favorably.
Growing investments by institutional players
Over the past two years, the number of cryptocurrency investment funds has grown significantly. Thus, data by Crypto Fund Research shows that in the middle of this year there were 804 crypto funds in the world: 357 hedge funds, 411 venture capital funds and 35 cryptocurrency ETF funds and direct investment funds. Their growing popularity is completely understandable. To put that into perspective: average profitability of a conventional fund equals 5–10 % per year, while a cryptocurrency funds generated 90 % profits in 2016, 1,708 % — in 2017 and 19 % — in 2019.
However, cryptocurrency funds a lot smaller than conventional ones. Most of them manage assets worth less than $10 mln, and only a few funds, such as Pantera Capital and Polychain Capital have over $1 bln. However, total assets managed by crypto funds are growing fast. In 2016 it amounted to $190 mln; now it’s $21.6 bln.
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Growth of total assets managed by crypto funds, according to Crypto Fund Research. Data shown in bln dollars. Source
These numbers demonstrate that institutional investors are heavily investing in the crypto sector. The most striking example is the crypto fund Grayscale Investments. In spring it bought one in three mined bitcoins and half of all mined ethers. In the first quarter this year, this fund raised record investments worth $503.7 mln. Assets it manages now amount to over $12.3 bln. 90% of Grayscale customers are institutional investors. Notably, in 2018 they only accounted for 50 %. It obviously demonstrates that institutions believe in ВТС and view it as an asset mitigating risks at the time of crisis. In the second quarter this year, almost 20 institutional investors notified the United States Securities and Exchange Commission (SEC) of having invested in Grayscale Bitcoin Trust (GBTC) — one of the Grayscale Investments funds. Investors included Ark Invest with assets under management amounting to $4.5 bln; Horizon Kinetic managing $5.3 bln, Rothschild Investment Corporation, Addison Capital, Corriente Advisor.
As you can see, the volume of institutional investments grows year on year. At this rate, in a few years institutions could invest hundreds of billions of dollars annually which would increase capitalization of all cryptocurrencies multifold.
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Cryptocurrency market capitalization compared with capitalization of other markets, according to BitcoinIRA. Numbers on the infographic are obsolete: crypto market capitalization is currently $560 bln, or three times higher. However, the diagram shows how much growth there is there for the crypto market. Source
Institutions believe in the future for cryptocurrencies
It’s interesting to see how institutional players view cryptocurrencies, in their turn.
Back in 2017 they were not interested in digital assets — almost half of them viewed bitcoin as a bubble that’s about to burst. However, growth of cryptocurrencies has turned things around — big investors are growing more and more interested in the sector. Let us cite a few examples.
In July, the cryptocurrency insurance firm Evertas surveyed 50 institutional players managing assets worth $78.4 bln: 25 were from the USA, 25 — from Great Britain. Respondents included pension funds, family offices, insurance firms, sovereign wealth funds and custodians.
The results were as follows:
- 90 % of respondents believe that institutional players will increase investments in cryptocurrencies over the next 5 years. 64 % think the market will show minor growth while 26 % are expecting a “surge” in institutional investments. 32 % also believe that hedge funds will become a lot more active;
- 84 % of respondents think that improved regulation would boost institutional interest in the market, while 80 % also noted that market expansion would improve liquidity;
- 76 % believe that the number of financial firms and funds investing in cryptocurrencies, will grow. The same percentage of respondents noted that negative interest rates and bond profitability would also encourage them to invest in crypto assets;
- 56 % of firms said they were still quite wary of investment in cryptocurrencies. The key obstacle is the lack of suitable insurance coverage options for these investments. 54 % were concerned about the insufficient reliability of crypto companies providing services to institutional investors;
- 60 % believed bitcoin would cost over $12,000 by the end of this year, 40 % thought the price would be $15,000, and 24 % assumed ВТС would fall as low as $10,000. 22 % were hoping ВТС price would reach $20,000 next year, and 28 % thought it would only happen in 2022. As practice has shown, BTC price of around $20,000 was already reached this year. Thus, bitcoin surpassed investors’ expectations again and sparked even greater interest with institutional players.
“A lack of adequate insurance for the crypto-assets market is clearly top of the list of concerns for many institutional investors, which is perhaps not surprising when insurers are only providing capacity of around $2 billion for a market that is worth between $250 billion and $300 million,” said Raymond Zenkich, President and COO at Evertas, in a press release. “We are working closely with the insurance community to address this issue.”
Survey results also show that institutional investors intend to increase investment in ВТС, despite short-term price falls, and want to buy the first cryptocurrency during falls. Institutional players believe crypto market regulations will improve, become more efficient and liberal, while the market will grow and ensure better liquidity wanted by most institutional investors. As the market develops, it will probably offer a wider range of investment tools for institutions.
Evertas survey results resonate with other surveys regarding attitude of institutions towards cryptocurrencies.
Here’re the results of the June survey that polled 774 institutional investors in the USA and Europe and was conducted by Fidelity Investments from November 2019 through March 2020:
- 80 % stated they viewed cryptocurrency as an attractive asset for investment;
- 60 % acknowledge they will invest in cryptocurrencies;
- 27 % of investors from the USA and 45 % of those from Europe currently own cryptocurrencies, including ВТС and ЕТН, and derivative financial instruments. Notably, in 2019 this number was 22 % in the USA — 5 % rise in a year is an excellent number when big players are involved. European investors are probably more active because European countries introduced negative interest rates a few years ago meaning banks don’t pay interest on the deposits, but charge fees for them.
- Key advantages of cryptocurrencies, as viewed by investors, are that digital assets have no connection to other asset categories, are based on innovative technologies and have a high growth potential;
- Key problems preventing arrival of institutional funds and a wider use of cryptocurrencies, as mentioned by Fidelity respondents, are volatility, market manipulations and “lack of foundations for value assessment”.
Therefore, institutions no longer think bitcoin is a bubble. It’s now seen as a new, highly profitable asset that can also be used as a protection asset hedging inflation risks in a crisis.
Institutional investors could help crypto market grow multi-fold
Numbers show that institutions continue to invest in the crypto market even during crisis. Moreover, they increase their investments and intend to do so over the next five years. It means this market has a huge growth potential in the future.
As you can see, infrastructure for institutions is now being actively developed. The biggest companies are launching their own funds and trading platforms. Institutions are ready to invest in the crypto market. Most of them are waiting, hoping to find an optimal entry point. Once it happens, the sector may see arrival of hundreds of billions or even trillions of dollars.
Don’t forget though that today crypto market growth and scaling is ensured by both institutional and private investors. It’s because bitcoin — just like UMI and many other decentralized coins — is cryptocurrencies for regular people. It’s about financial freedom and independence.
Cryptocurrencies are building an alternative to the existing financial system, making it safer, more profitable and convenient. Therefore, there’re no doubts the entire crypto market is doomed to huge success. UMI is an integral part of the market, reaching for new heights along with bitcoin and other cryptocurrencies towards a new future. Join us now. Let’s change the world together!
Sincerely yours, UMI Team!
