Institutionalising crypto: Exploring the shift of institutional investors
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Recently, there has been a growing interest and influx of institutional investments in the cryptocurrency market, arguably creating a change in the digital asset world.
The shift shows an increasing interest and acceptance of cryptocurrencies and preludes a new stage of investment opportunities and issues.
Below, we will explore the effect of institutional investments in the cryptocurrency space and the potential for investors.
Let's begin.
The changing narrative
Initially, cryptocurrency was typically associated with retail investors like enthusiasts and working-class individuals.
However, this has changed in recent years with institutional entry into cryptocurrency.
Institutional investors now manage, sell, and buy assets for customers, clients, shareholders, and members.
The cryptocurrency space mainly includes financial institutions, principal trading, family offices, hedge funds, and pension funds.
Investors might use derivatives or trade spots to achieve their investment aims. For example, investors might buy Bitcoin or speculate on Bitcoin futures.
Institutional investors also include crypto funds ETFs. For example, Grayscale Bitcoin Trust owns Bitcoin worth about $16.8 billion, while the Grayscale Ethereum Trust owns Ethereum worth $5.4 billion.
With these funds, individuals don't need a wallet or deal with any tokens to invest in cryptocurrency.
Reasons for institutional cryptocurrency adoption
Various factors have resulted in the increasing interest of institutions in cryptocurrencies.
Some of them include:
- Regulation and legitimisation: With regulatory clearness and legitimisation of digital assets by the government and regulatory bodies, institutional investors now have the certainty and confidence to enter the markets. While the process of regulation seems to be growing at a slow pace, experts are keen to see that happening as soon as possible.
- Market maturation: The cryptocurrency market has come a long way from its inception. Like the stock and forex markets, the cryptocurrency market is mature for institutional investors who seek higher returns and asset diversification. Bitcoin tops other assets by a large margin.
- Hedge against inflation: With inflationary pressures and unusual monetary stimulus, cryptocurrencies, especially Bitcoin, are viewed as a hedge against inflation and currency devaluation. Irrespective of where you live, one Bitcoin always equals one Bitcoin.
- Institutional infrastructure: With increasing institutional infrastructure, such as derivative products, custody solutions, and regulated exchanges, there has been an increase in institutional entry into the cryptocurrency market. Many companies like Facebook (Meta), IBM, and Amazon are starting to partner with cryptocurrency companies for the new world.
How institutional investment has affected the crypto market
With the increase in institutional investment, various effects have been observed on the dynamics of the crypto market.
Some of them include the following:
- Price stabilisation: Long-term investments by institutional investors add to price stabilisation. It reduces the high price swings usually associated with cryptocurrencies.
- Increased liquidity: The participation of institutions in the crypto market has significantly increased liquidity in the cryptocurrency market. As a result, there has been reduced volatility which makes it easier for investors to take positions.
- Mainstream acceptance: With institutions such as Ark Invest and Blackrock participating in the crypto space, there has been an increase in the credibility of the crypto market. This has paved the way for a wider acceptance and adoption among the general populace and retail investors.
- Market maturation: Institutional investment promotes market maturation through the introduction of advanced trading strategies, regulatory compliance standards, and risk management practices.
The future: Possibilities and difficulties
As investment by institutions increases in the cryptocurrency market, it offers both endless possibilities and challenges for every investor.
Some of them include:
- Regulatory scrutiny: With more institutional involvement, there will be greater regulatory scrutiny, which will result in compliance requirements and stricter regulations, therefore affecting investment strategies and market dynamics.
- Volatility management: Institutionalisation results in volatility hedging and risk management expertise. This can help reduce the deep-rooted volatile nature of cryptocurrency and attract conservative investors. Currently, cryptocurrency is a well-informed and fast-paced environment, leaving conservative investors out.
- Diversification: As institutions continue to adopt cryptocurrencies, retail investors now have new avenues to diversify their portfolios. A great advantage of this is that it improves risk-adjusted returns. In the crypto space, individuals can diversify among various narratives like artificial intelligence, real-world assets, and gaming.
- Development and innovation: Institutional investors partaking in the cryptocurrency market are expected to increase innovation in the world of cryptocurrency, which will also result in the development of new financial services, infrastructure, and services benefiting all market participants. Cryptocurrency is still in the early stages of its economic revolution, with the pieces being put in place by financial institutions, governments and organisations.
Endnote
The arrival of institutions into the cryptocurrency market presents a monumental stage in digital asset evolution.
Though it will bring liquidity, new investment opportunities, and credibility, it also creates market structure, operation, and regulatory challenges.
However, with the growth of institution adoption, every investor must know how to navigate the complex interchange of the crypto ecosystem and traditional finance while capitalising on its potential.
This information is of a general nature only and should not be regarded as specific to any particular situation. This should not be taken as financial advice to buy, trade, or sell cryptocurrency or use any specific exchange. This is not intended for use as investment, financial or legal advice as each individual's need will vary.
