Published: December 6th, 2020
Bitcoin’s popularity with institutional investors is on the rise. A survey of 800 institutional investors by Fidelity Asset Management found that 37 per cent now own crypto assets.
From first movers like Grayscale and MicroStrategy to Wall Street stalwarts like Goldman Sachs, Bitcoin has finally found a place in traditional investment portfolios. BTC is seen as an effective hedge against fiat currency devaluation and inflation, but there are also technical reasons why institutional investors have gone bullish on Bitcoin.
With some estimates suggesting BTC could hit USD 1 million by 2025, many investors and financial institutions have decided that holding BTC might be less risky than not having any Bitcoin exposure at all.
An analysis by research firm Messari says that more than 80,000 BTC — representing 0.5 per cent of all the Bitcoin in circulation — are now owned by publicly traded companies.
2020 is looking increasingly like the year that Bitcoin came of age. But what sparked the rally, and do institutional investors see in Bitcoin today that they didn’t see before?
Because Bitcoin is non-sovereign currency and not correlated to other asset classes, investors have found it to be a useful hedge that diversifies portfolios against the risks inherent in traditional, highly-correlated markets like the Nasdaq and the dollar.
Institutional investors have realised that there is value in the secure, borderless transactions and access to new opportunities that blockchain and BTC deliver, options that aren't present in traditional financial markets.
Borderless payments, smart contracts, lower fees and faster, more secure transactions are acting as a catalyst for the end of physical money and the rise of national digital currencies.
Influential investors like Paul Tudor Jones have started talking about Bitcoin as the ‘best hedge available' against US dollar inflation. At the same time, banks and tech companies all invest heavily in crypto R&D projects like Morgan Stanley’s new business blockchain and digital currency house, which will offer services related to verifying and recording finance transactions.
Financial regulation requires big financial players like hedge and mutual funds to hold clients assets with a professional custodian. That's one big reason why those institutions sat on the crypto sidelines for so long. There wasn't a credible or widely-accepted custody solution for large scale crypto holdings.
That’s begun to change with the arrival of institutional-grade custodian solutions. A newly-launched crypto custody firm called Anchorage is one of those solutions. Backed by leading tech VC firms, Anchorage aims to provide a crypto-native digital asset custodian for institutions.
Liechtenstein-based Bank Frick, which targets professional market participants and financial intermediaries in Europe, has also made digital asset custody a priority service for its private banking customers.
Other banks are following suit, taking their cue from recent announcements by the US Comptroller of the Currency that banks can provide cryptocurrency custody services by holding the cryptographic keys associated with a crypto holding.
Giving regulated financial institutions the green light to hold the same safekeeping services that only specialist firms offered previously, has opened the door to a new crypto banking services sector.
Coupled with the arrival of crypto insurance companies, investors have finally found the comfort zone they needed. Along with reliable, regulated custody services, they can now take out insurance cover policies for their digital assets.
Previously sceptical institutional investors are now wading into crypto markets with gusto. Their added heft and influence is also helping cryptocurrency exchanges raise their game, demanding better protection for investors’ money. All of these factors have come together in a short period, creating the catalyst for institutional investors and funds to take significant positions in crypto.
As the crypto market is spurred upward by institutional interest, the large purchases being made by big firms are making their presence felt.
Their arrival into the crypto ecosystem and their interest in holding bodes well for mainstream crypto adoption, promising an easy transition from traditional finance to the digital economy, where trust in Bitcoin is taken for granted and supported by greater understanding of the underlying technology and its benefits.
In additional to its hedge benefits, investors are also buying into the promise and potential upside of decentralised finance, which is spurring any number of new business models, services, and revenue streams.
Services like Compound and Maker, for example, enable individuals to secure personal loans in minutes without having to disclose their identity. At the same time, the yields that new DeFi products can deliver are higher than traditional options like savings accounts and certificate of deposit accounts.
The DeFi revolution and its potential benefits are another driver behind the shift to what cryptocurrency advocates have always longed for: a digitised and borderless asset class.
The survey by Fidelity Asset Management mentioned above found 80 per cent of institutions looking to increase their digital asset holdings in the near future, so it may not be a coincidence that the number of Bitcoin addresses has also been rising in recent months. Addresses with holdings north of 1,000 and even 10,000 Bitcoins have also grown in number. When you consider the declining balances now being seen on exchanges, the implication is clear: more whales and big investors have decided to go HODL with their Bitcoin investments.
Another recent report by KPMG found that major banks and asset managers have begun launching their own institution-grade crypto products and services. That would seem to confirm the rising trust in digital assets in the hallways of traditional finance.