The cryptocurrency space has grown dramatically over the past year. Bitcoin reached the record, there has been a boom of NFT and DeFi. Large investment funds, banks and other traditional financial institutions are getting closer to blockchain technology.
As institutional investments move into the cryptocurrency space, there are questions about how this will affect the industry.
Why are Institutional Investors Investing in Bitcoin?
Every year, the average level of cryptocurrency ownership increases, and this massive user base has made bitcoin ownership attractive to institutional investors.
Number of Bitcoin block explorer Blockchain.com wallet users worldwide from November 2011 to April 6 2022
Many companies are beginning to introduce cryptocurrencies, giving users the ability to pay with crypto assets around the world. For example, PayPal not so long ago added a service that allows users to buy cryptocurrency. This has been instrumental in attracting institutional investors. Investors have begun to realize the long-term value of cryptocurrencies, even in spite of volatility. Positive reviews about Bitcoin from global investors such as Goldman Sachs, BNY Mellon, Citibank and others increased demand for Bitcoin.
So why do investors see Bitcoin as a more attractive investment?
If we remember the pandemic, we see that some institutional investors invest in cryptocurrencies to avoid inflation, buying cryptocurrency as protection against economic uncertainty.
The pandemic has triggered an economic crisis not seen in decades. Institutional investors in such a situation seek to hedge against monetary inflation by investing in inflation-proof assets. Stock market was extremely overvalued, big investors needed to look for alternatives. Guess which alternative was the most suitable? That's right, Bitcoin.
How do institutional investors increase interest in cryptocurrency?
Take, as one example, Elon Musk, the founder and CEO of Tesla, who allowed users to buy Tesla for Bitcoin. He not only increased the popularity of cryptocurrencies, but his tweets made a real furor for some tokens in the market. The entry of leading names like Tesla forced many conservative institutions to drop their bans on Bitcoins.
Look at what happened to the value of Dogecoin, which Elon Musk actively promoted on his Twitter.
Also, institutional investors give people confidence. Not many people understand financial markets and certainly not many people understand blockchain and cryptocurrency. Obviously, they will follow the example and buy exactly the asset that has been influenced by a major investor, as was the case with Elon Musk and DOGE.
Institutional investors put their reputation on the line one way or another when they place their portfolios or get in the news after some big investment. People won't put their money into something questionable unless they see some reputable source doing the same thing.
The Impact of Institutional Investment on the Crypto Industry
Although many crypto-enthusiasts see only pluses in the arrival of institutional investors, not everyone shares this position. Should institutional investors be called the "saviors" of cryptocurrency? Or on the contrary are they the ones who will lead the digital asset industry to collapse? Let's understand.
Obviously, institutional investors buying bitcoin will lead to a shortfall of it, which will raise prices even further. The exit of institutional investors will also serve as a catalyst for the mass adoption of bitcoin. Seeing the benefits that large institutional investors gain by investing in bitcoin, small investors will also be tempted.
Institutional investors are helping the cryptocurrency market become more efficient. For example, when the price of BTC is undervalued, they use this situation to raise bitcoin and lower the price when it is overvalued. It's a kind of training for everyone.
But there's also a downside. Because institutional investors are tough players with a lot of experience in the financial market, they follow these methods to lower their risks and increase their profits.
Institutional investments in cryptocurrency are most often speculative in nature. Most investors try to capitalize on the appreciation of an asset by spreading information about a particular asset and buying it in advance. Again, back to Elon Musk and DOGE.
Can institutional investors bring the next wave of excitement to the cryptosphere?
Bitcoin was created over a decade ago and has remained quite popular among certain groups of people, but has got wide popularity a few years ago. Despite the fact that Bitcoin was initially associated with illegal activities, such as using Silk Road, the first darknet marketplace, as a payment for drugs, in just ten years blockchain, the technology behind bitcoin, has reached a whole new level and spawned a new category of financial instruments - cryptocurrencies. Over the years, we have seen a big push for the mass adoption of cryptocurrencies. If the ICO boom was in 2017 and the bear market has been notable in 2018, large institutional cryptocurrency investments began in 2019, and the boom continues to this day.
In this time frame, institutional investors have attracted many people who were previously quite skeptical of the cryptocurrency industry to invest in cryptocurrencies. Institutional investors have remained the gold standard in defining investment quality; they control large equity of financial assets and have at their disposal significant resources.
Institutional investors who have been skeptical of Bitcoin
In a 2018 interview with Fox Business, Warren Buffett said about Bitcoin"Probably rat poison squared." Then in 2020: "I don't have any Bitcoin. I don't own any cryptocurrency, I never will". And in a year his company Berkshire Hathaway has bought $1 billion worth of stock in a digital bank that focuses on crypto.
In October 2021, JPMorgan Chief Executive Officer Jamie Dimon labeled Bitcoin as “worthless”. JP Morgan has since changed its mind and is now expecting the price of Bitcoin to rise as high as $130,000, labeling it “digital gold”.
Goldman Sachs in 2020 listed 5 reasons why they believed cryptocurrencies were not a suitable investment or a new asset class.
What institutional investors invest in cryptocurrencies in 2022?
Even though we are now seeing a bear market, cryptocurrencies raised $10B in Q1 2022.
In April 2022, $6.7B was raised.
In May 2022, $4.3B had already been invested in cryptocurrencies. The cryptocurrency market has already attracted more than $11B in investments in Q2 2022 (even though it's not over yet).
Andreessen Horowitz raised a $4.5B cryptocurrency fund to take advantage of bargains in the down market.
Hedge fund SkyBridge Capital plans to invest most of $3.5B in cryptocurrency.
Sequoia Cap announced the launch of its own $500-$600M cryptocurrency fund.
MicroStrategy bought 660 more bitcoin for $25M as the price dipped below $40,000 per coin.
As the range of blockchain applications increases, institutional investors' interest in cryptocurrency markets will only grow.
Cryptocurrency continues to evolve, showing surprising resilience to investors' worst expectations. While the aggregate capitalization of cryptocurrencies is enormous, it is far from peak. Digital money is just beginning to enter the mainstream and still suffers from various biases that discourage investment.
For now, we are trying to survive the bear market, and there will be a lot of enthusiasm for investment from institutional investors going forward.