At the start of 2021, the cryptocurrency industry was bursting with news of increased institutional investment, and this is still largely true. Despite reports suggesting increased outflows from institutional investors, net inflows are still very much positive. Additionally, though Bitcoin (BTC) appears to be the investment of choice for liquidations, institutional investment into Ethereum (ETH) has never been healthier.
From Wall Street hedge funds to major banks, large-scale investors are hopping aboard the crypto train. Bitcoin's fall from its all-time high at $65,000 placed doubt in the minds of all cryptocurrency investors, though that could be changing as its price has since started to recover.
BTC accounts for over 44% of the total $2 trillion digital asset market capitalization, while Ethereum stands at around 18%. Back in May, the number of addresses holding more than 1,000 BTC fell to around 2,100 from the 2,500 mark seen in February, according to blockchain data analytics firm CoinMetrics. However, most indicators point to institutions increasing their overall holdings.
According to Nikita Ovchinnik, chief business development officer of the decentralized platform 1inch Network, “There is no doubt that institutional investors have a long-term bullish approach to crypto and Bitcoin specifically.” Long term, he also said that the key obstacle for institutions would lie in the technology itself.
“Due to its architecture, DLT works in a unique way that differs from the established IT and financial product infrastructure. It would certainly require some adjustments and updates in order to onboard more entities into crypto.” He added further:
“The number of institutional investors that have exposure to crypto has risen dramatically over the last year, and they didn't come for short-term gains.”
International investment banks and financial services companies like Morgan Stanley, BlackRock, Goldman Sachs and JP Morgan have all set up Bitcoin-related services and funds over the last few months. After reaching a peak 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 climbing back to nearly $41 billion amid the recent rally.
With concerns of a regulatory crackdown on digital asset exchanges and service providers, as well as China's stance on Bitcoin trading and mining, there are enough reasons for traditional investors to be hesitant to enter the market. However, the recent pushback above the psychological mark of $40,000 could be a sign that the sentiment is recovering. The real question is, what will the institutions do next?
ETH and flow
One of the biggest reasons investors have flocked to Bitcoin over the last two years has been the rising inflation rate of the U.S. dollar. Amid the ongoing COVID-19 crisis, the United States Federal Reserve has printed trillions in the name of stimulus checks, pushing concerned investors to look for other places to park their capital.
In mid-August, Bitcoin reported its sixth consecutive week of institutional outflows, with over $22 million in liquidations in a single week. This marks the longest period of outflows for the digital asset since 2018. Still, the total assets under management for digital asset investment products rose 10% in the same week, though this was primarily due to price appreciation.
On the other hand, multi-asset products appear much less uncertain about their direction, with institutional investors increasing their holdings by $7.5 million and attracting nearly $12 million through inflows over the last month. In contrast, over the same period, Bitcoin funds have experienced almost $68 million in outflows.
All of this points to institutions diversifying their holdings into other digital assets besides Bitcoin, with altcoins like Ethereum, Cardano (ADA) and Binance Coin (BNB) also seeing increased inflows. While BTC outflows may be higher than ever, institutional investments into digital assets are higher this year than ever before.
“The undeniable pattern is that institutional interest and participation in the field continues to rise,” said Jack Tao, CEO of a Singapore-based cryptocurrency exchange Phemex in a conversation with Cointelegraph, 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 was still in its early phases of adoption and that while some technologies and applications are already in place, we're still only seeing the tip of the iceberg. “Smart institutional investors can sense the change coming and wish to position themselves squarely as beneficiaries for what's to come,” he said, adding: “The final use cases that blockchain will address hasn't even been imagined yet.”
Investing in digital assets as an institution is very different from retail purchases. Despite most crypto-positive institutions already trading on forex markets, they face risks that are very different from traditional systems. Finding differences in spot prices can become a costly ordeal, and since they end up trading with unknown counterparties, factors such as technological reliability and liquidity depth are far more critical than usual.
“There is still a long way to go,” Daniel Santos, CEO of Woonkly Labs’ automated market maker, defi.finance, told Cointelegraph: “[Institutions] don’t just need regulated products, but also easy-to-use products that are tailored specifically to their needs.” He added:
“Institutions are looking for products that enable them to invest in DeFi safely with peace of mind. I believe they’re taking a long-term approach, and they are bullish.”
“DeFi attracts a lot of attention,” said Yves Longchamp, head of research at SEBA Bank, a FINMA licensed digital assets bank. As Longchamp told Cointelegraph, institutional investors are focused on three main factors, including adding yield to their portfolios — a source of revenue that doesn’t exist in traditional finance.
Despite consistent Bitcoin outflows, institutions appear to be bullish as ever about the digital assets space. Recently, the global professional financial intermediary network, TP ICAP, announced that it would be launching a cryptocurrency trading platform along with industry giants Standard Chartered and Fidelity Investments.
Though it seems that big money is entering the industry with confidence, bringing their capital into the space, price appreciation could take a back seat as regulation becomes a more prominent concern for institutional investors.
Cryptocurrency adoption is rising faster than ever before with previously less proactive markets seeing increased movement, while the more actively participating regions grapple with broader changes and regulatory issues.
According to director of financial markets at digital asset exchange OKEx Lennix Lai, the main concerns are around Anti-Money Laundering (AML) and tax evasion, as he told Cointelegraph: “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, since “the majority of protocols are completely permissionless, there is always a possibility of becoming a counterparty to some kind of criminal.”
However, he also added that these issues are being ironed out by development teams at the protocol level, taking pre-emptive measures to ensure their regulatory approval in the long run. This could become a significant factor for institutional investors entering the space, who are required to strictly adhere to regulations and the decisions of their governing political authorities.
According to chief operating officer at Huobi Trust Robert Whitaker, institutions are happy with Bitcoin and are starting to create market offerings around it. “Institutions are still aggregating a significant amount of BTC for their own needs and on the balance sheets,” he told Cointelegraph, adding: “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 are endless for blockchain technology. The opportunities in this space are seemingly unending, and even the smallest ones can be immensely profitable. While Ocvhinnik believes institutions will focus more on cross-chain Layer-one solutions, Tao says there will be more focus on decentralizing traditional financial services and exploring more experimental aspects of the industry like NFTs and GameFi.
According to Rachid Ajaja, CEO of AllianceBlock, a decentralized capital market, decentralized finance, or DeFi, offerings are expanding into more traditional structured products like product wrapping and structured loans. “We are in a very exciting time,” he told Cointelegraph, adding: “The shift towards DeFi is happening right now.”
The biggest challenge will be finding a balance between the industry's ethos of decentralization and achieving the level of compliance governments seek. For now, while the two forces seem fundamentally opposed to each other, a more robust solution will likely arise 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 CEO of Bitstamp exchange Julian Sawyer in a conversation with Cointelegraph, adding: “By separating good actors from the bad, building more trust with investors and holding companies responsible for their actions through clearer guidelines, regulatory interest means credibility and growth for the whole industry.”