The Role of Institutional Investors in Crypto Adoption

Jun 9, 2022
6 min read

The asset management business constantly assigns investments to the crypto area by several institutions. By the end of 2020, institutional AUM had been assigned to the crypto asset class, totalling $15 billion. Allowing crypto payments for products and services is another sort of crypto acceptance among instructions. Precise regulation of the crypto industry will likely encourage institutions to accept cryptocurrency without fear of legal ramifications.

Financial institutions and huge enterprises have often viewed the Bitcoin ecosystem with suspicion. However, there was a significant shift in how institutions regard digital assets after 2020. This is because the economic consequences of the Covid-19 epidemic, which resulted in worldwide lockdowns in the spring of 2020, prompted governments to take measures to implement economic stimulus schemes and cut interest rates to near-zero levels.

Getting Comfortable with Crypto

The story around Bitcoins (BTC) became that of a safe haven against inflation – a "digital gold" – as professional interest in cryptocurrencies grew. This was bolstered by Bitcoin's halving in May 2020, as well as the 2021 digital bull run, which saw BTC reach new highs in April ($65,000) and November ($69,000). The digital asset market, on the other side, has not always been stable. Shortly after reaching record highs in April 2021, BTC fell to 55% of its value, dipping under $30,000 on July 20 and bringing the overall market capitalization down to $1.199 trillion. Following several flash market crashes, the crypto market cap fell to levels last seen in September and January 2022.

Despite these swings, institutional demand has remained strong, with data showing that significant players have continued to "buy the dips," notably in the wake of China's banning of cryptocurrency and Bitcoin mining, the Russia-Ukraine conflict, and rising inflation and interest rates.

To put things in context, according to a 2020 poll conducted by Fidelity Digital Assets, an increasing percentage of the United States and European institutional investors think that data assets should be included in their investment portfolios, with nearly 80% of them considering this asset class intriguing. As per the report, 36% of those firms had already begun to invest in cryptocurrency. Financial advisors, crypto hedge & venture funds, classic hedge funds, endowments, and high-net-worth individuals were among the institutions involved.

What are the steps that institutions take to get involved with cryptocurrencies?

Let's have a look at these steps

Institutional Crypto Adoption in Different Forms

Asset Management

In recent years, a wide range of institutional investors has shown an increased interest in digital assets. Bitcoin and other crypto-assets "establish a new asset class that will rapidly win the recognition and involvement of institutional investors," according to a February 2022 analysis by Wellington Management analyzing cryptocurrencies as an asset class. Large players will gradually transition to more specialized use cases like DeFi and NFTs, according to the business, but for now, they are only interested in Bitcoin and a few altcoins.

In this context, unprecedented events such as the crisis in Ukraine and shifts in interest rates have fueled demand for diversifying into this asset class. Big, well-known investors have boarded the ship, including blue-chip firms, hedge funds, and Wall Street bulls.

Whale Bitcoin Addresses

Bitcoin "whale" addresses, which hold 1,000 BTC or more, grew from around 2,120 at the beginning of 2020 to a high of 2,298 in Mach 2022, according to statistics from blockchain-analysis firm Coin Metrics. The number had reduced to roughly 2,285 since then.

Institutions are continuing to grab crypto assets. Finoa, a renowned European digital asset management platform, warns that entering the cryptocurrency market for the first time is a big deal for both shops and institutions. Different institutional investors choose different entry techniques, according to their 2020 study on how financial firms get involved in the burgeoning crypto market. Those who do not want to buy crypto directly might opt for one of the numerous crypto derivatives, including Spot Exchange Traded Funds (ETFs), Futures ETFs, and Innovator ETFs. While these were previously only available to investors in Canada and Europe, the SEC recently approved some ETFs (the Volt Crypto Industries Revolution and Tech ETF, ProShares Bitcoin Strategy ETF (BITO), and Teucrium Futures Fund) that were provided institutional investors with access to cryptocurrencies.

Prior to this, Grayscale, a digital asset management corporation, had always supplied a trust infrastructure that allowed US institutional investors to invest. The Grayscale trust accepts new investors through private placements while also purchasing bitcoins to provide the requisite backup for the shares.

Firms frequently begin examining digital assets in relation to client requests, which is a common thread running across all of these efforts. This is undoubtedly one of the causes at work here, but as is often the case with the rapid adoption of a new trend, numerous catalysts have combined to boost the value of and demand for digital assets.

The construction of institutional-grade infrastructure, increasing regulatory clarity, and a burgeoning DeFi ecosystem are the three main themes.

1. Infrastructure fit for an institution

Several institutional-grade safety and infrastructure providers have emerged in recent years. These companies are primarily concerned with creating a link between the digital asset ecosystem and the traditional financial system, beginning with custody. Before financial institutions can feel comfortable providing digital asset services, they must first figure out how to keep their clients' assets safe.

According to a survey commissioned by Nickel Digital Asset Management of institutional investors and wealth managers from the United States, the United Kingdom, France, Germany, and the United Arab Emirates, security concerns about digital assets and custodial services are a "significant" barrier to stop many from investing in digital assets for the very first time. It is the core flaw for which licensed custodians offer solutions. As previously said, serious players who continued to develop and polish their products throughout the crypto season have emerged as leaders in their areas, seizing the new institutional wave. With a variety of sophisticated solutions such as dispersed keys and multi-party computation (MPC) vaults, core transactional technologies, comprehensive insurance coverage, regulatory compliance tools, and state-of-the-art infrastructure security, in terms of strengthening market infrastructure, the industry has achieved consistent progress.

To be clear, the ecosystem's foundations are still growing, but they tick enough boxes to boost institutional confidence, which has been one of the key drivers of adoption, along with the advent of institutional-grade and fully certified custodians.

2. Clearer regulatory guidance

Because of the diverse and new properties of digital assets, authorities around the world have been challenged to create applicable frameworks since the first Bitcoin was mined in 2009. Digital assets might have qualities that span numerous asset types, based on their layout and utility. Investor enthusiasm has been stifled due to a lack of certainty in certain countries. Regulators, on the other hand, have been heading in the right way in recent years in terms of giving the certainty needed for institutional involvement.

Singapore has begun awarding regulatory approval to virtual asset service providers, including digital payment tokens (such as Bitcoin) under the Payment Services Act and secure tokens under the Securities and Futures Act. With its latest proclamation emphasizing that all crypto-related trades in the nation are unlawful, including those supplied by offshore exchanges, China has taken a different tack.

Switzerland has extensive laws on distributed ledgers, and the European Commission has proposed the Market in Crypto-assets (MiCA) plan, which would establish a common licensing framework across all member states by 2024.

The march toward regulating digital assets, regardless of the precise number of rules, gives a good impetus for institutional adoption. To grow, digital assets, like any other asset class, require clear regulatory frameworks.

3. The DeFi ecosystem

The rapid expansion of the DeFi ecosystem is another element that has boosted the demand for digital assets. Although it has only been a formal motion for just over two years, the peer-to-peer decentralized finance ecosystem has seen a surge of innovation during that period. There are currently dozens of blockchains, hundreds of interchain solutions, and thousands of decentralized applications to choose from. The entire financial system is being rebuilt from the ground up with more security, transparency, and interoperability built in from the beginning.

Traditional financial institutions, on the other hand, may find it difficult to adapt to new technology and products in a new decentralized financial system that innovates at such a quick rate. Finding dependable providers who can deliver a comprehensive array of services, including the capacity to incorporate new digital assets as they emerge and adapt to the fast-paced digital asset ecosystem, all while adhering to compliance rules within a growing regulatory framework, is the solution.

Adoption has progressed to the next stage.

We are only at the start of this generational shift, and cryptocurrencies, stablecoins, and NFTs are only a small part of the picture. Security tokens, for example, might be a step in the evolution forward of traditional financial markets, allowing for increased efficiencies and lower trading costs. CBDCs, which are already being investigated by 81 nations, will allow governments to use blockchain technology while maintaining control over their own sovereign currency. The same can be said for the world's 1.7 billion unbanked people, who may use a simple mobile wallet to transfer funds instantaneously at a fraction of the cost of traditional banks. The list of possible applications is endless.

Overall, digital assets are here to stay, and financial institutions have begun to understand their revolutionary potential and participate in this exciting new environment. Some are still on the fence, whereas others have already taken advantage of the situation. However, as we go into the future stage of digital asset adoption, getting involved early ensures a competitive edge in the long run.