Introduction
The saying “the journey of a thousand miles begins with a step” stands true for cryptocurrency. Cryptocurrency has a humble beginning starting with Bitcoin and was below a dollar. The journey of cryptocurrency, which started about a decade ago, wasn’t an easy one, even though it has grown to have hundreds of cryptocurrencies today. The cryptocurrency journey was a tough one as it faced outright rejection from professionals and institutions alike. A popular notion was that cryptocurrency was a worthless and useless digital asset that only swindlers and criminals accepted. There was also the concern that cryptocurrency was too volatile, not regulated, and not highly secure. Despite the odds stacked against Crypto from the institutions and professionals, it continued to soar high like an eagle.
In a twist of fate, cryptocurrency has become the hallmark of acceptance from institutions.
Recently, the adoption of cryptocurrency by institutions is increasing, with Bitcoin leading the chart. This is due to the institutions devising ways to bypass obstacles such as volatility by using sophisticated trading tools and cryptocurrency derivative markets introduced by exchange platforms such as Coinbase.
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The derivative market and sophisticated trading tools have helped increase the confidence of institutional investors in the cryptocurrency space hence their increased interest.
What is Institutional Investment?
It is necessary to have a foundation concerning institutional investment before discussing how it affects cryptocurrency.
In simple terms, Institutional investment is the act of pooling resources together from different sources (individuals inclusive) to buy and sell to make a profit. The companies that are involved in investing are known as institutional investors.
Institutional investors are large and legal organizations that gather money from various sources to trade in financial assets such as securities, stocks, and bonds.
Examples of institutional investors are;
banks
mutual funds
hedge funds
credit unions
insurance companies
University advisors
pension funds
private equity funds
The Top Ten Public Institutions with Bitcoin Holdings
MicroStrategy: MicroStrategy is the largest institution holding Bitcoin. The company’s CEO, Saylor, made it known during the Binance Blockchain week that the company prefers Bitcoin over Gold as a primary reserve asset. The company holds about 124,391 Bitcoin as a primary reserve asset.
Tesla: Tesla, the firm that makes electric cars, is not left out of investing in Bitcoins. The company showed a great deal of interest in Bitcoin in 2021 and made it the second-largest firm in terms of Bitcoin holdings. Tesla holds about 42,902 Bitcoin.
Galaxy Digital Holdings: Galaxy Digitals is the largest holder of cryptocurrency among the firms directly involved in the cryptocurrency industry. It holds about 16,400 Bitcoin.
Voyager Digital Limited: this firm is a cryptocurrency brokerage firm that plans to provide a one in all platform for digital trading assets. The firm holds about 12,260 Bitcoin.
Block, Inc: Block Inc, formerly known as Square, is a firm that started investing in Bitcoin in October 2020 and has since continually added to its holdings. The firm holds about 8,207 Bitcoin.
Marathon Digital holdings Inc: the company is a Bitcoin mining company with about 7,649 Bitcoin in its corporate treasury. The company’s vision is to build the most significant mining ridge in North America at a low energy cost.
Hut 8 mining corps: this is another mining company with about 5,242 Bitcoin in its treasury.
Coinbase Global Inc: Coinbase, one of the world’s largest and populous cryptocurrency exchanges, is another institution that has 4,482 Bitcoin on its balance sheet.
Riot Blockchain, Inc: this is a mining Bitcoin company from the US. It holds about 3,995 Bitcoin.
Bitcoin Group SE: this is a Germany based company that hold about 3,947 Bitcoin.
Implications of Institutional Investment in cryptocurrency
In recent years, there have been wide entrances of different institutions into the cryptocurrency niche. A report by Bloomberg confirms that institutional investors such as endowment and hedge funds buy a vast amount of cryptocurrency using private transactions. It puts the worth of cryptocurrency bought consistently by investors at around $100 million. The question arising from such investment is, how does it affect cryptocurrency.
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Below are the ways institutional investment affects cryptocurrency.
Institutional investment helps to keep the market less volatile and more stable.
The involvement of institutions in the cryptocurrency market should ordinarily lead to an increase in demand, resulting in a higher price. This definitely would be in line with the law of demand, which states that the higher the demand, the higher the price, and vice-versa. Remember that the supply of Bitcoin is limited; hence the more the order, the higher the price. As the demand increases, Bitcoin becomes limited in supply resulting in scarcity.
The thought of many in the cryptocurrency niche agrees with the law of demand, which naturally is correct. Some even fear that the involvement of institutions may affect the liquidity of Bitcoin. However, the reverse seems to be the case, as the price of Bitcoin hasn’t been affected much since the institution started investing. The involvement of the institutions was not directly proportional to the price or volatility of Bitcoin because the institutions were now buying Bitcoin from miners. In what is known as over-the-counter (OTC) purchase to avoid crashing the cryptocurrency market and exchanges. The route followed by the institutions has helped keep the price of cryptocurrency relatively stable.
Another significant advantage of the institutions is the involvement of strict regulations guiding them. Hence, they can hardly manipulate the market, unlike the whales of retail investors.
It brings wider publicity and accessibility to cryptocurrency.
It has been a decade since Bitcoin’s existence. Still, the involvement of institutions will help make the coin more popular and accessible to the broader public. For instance, PayPal allows the trading of Bitcoin on its platform, which has millions of users. This action can make its users take up Bitcoin reserves which further increase the accessibility and publicity of the coin. Grayscale’s Bitcoin trust runs a model that allows investors to speculate on Bitcoin even when they do not intend to buy it directly. This model makes it easier for people to be aware of Bitcoin and helps to ease their entrance into the market whenever they decide.
It gives room for creating cryptocurrency investment products.
Over the years, when institutions have become interested in cryptocurrency, we have seen increasing cryptocurrency investment products being launched. The first is the opportunity that the Goldman Sachs Group gave to their customers to trade Bitcoin products on its platform. The Goldman Sachs Group, in conjunction with Galaxy Digital Ventures LLC, invested in a cryptocurrency investment product known as BitGo’s product. The product is a custodial wallet built mainly for institutional investors to store digital assets.
In 2019, the New York Stock Exchange owner, Intercontinental Exchange, launched Bakkt, a platform for trading Bitcoin futures.
One key factor that has helped institutions create cryptocurrency investment products for their customers is the increased demand for Bitcoin.
An increase in secured cryptocurrency trading
In the past, cryptocurrency trading platforms allowed their customers to trade on their platform without any identification or Know-Your-Customer [KYC] compliance documents. This can allow criminals to move cash that ordinarily will not be possible with the banks or centralized platforms. For instance, many cryptocurrency exchanges in the United Kingdom and the United States were not fully KYC compliant.
The lack of secure infrastructure is one of the factors that kept institutions from associating with Bitcoin and other cryptocurrencies in the past.
However, the involvement of institutions in the cryptocurrency space is changing the narratives as they work in tandem with regulatory bodies to create a clear KYC policy to ensure that cryptocurrency trading is more secure than in the past.
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Conclusion
The cryptocurrency niche has seen a significant increase in institutional investment. The investors give a new dimension to the cryptocurrency’s inflow of capital and liquidity. It also provides the market with the hope of security, regulation, lower volatility, legitimacy, and transparency into trading cryptocurrency, further making the market conducive. It will also help Increase the publicity and accessibility of cryptocurrency, giving it the leverage needed to make it truly global.
Global established institutions are just beginning to come into the cryptocurrency space; hence, it may take a while to fully understand its impact on cryptocurrency. But whatever the effect turns out to be, one thing is sure, the involvement of institutional investment in cryptocurrency is a significant achievement that should be enjoyed.