Until very recently, financial institutions viewed cryptocurrencies with skepticism. Satoshi Nakamoto created BitcoinBitcoin is the first decentralized digital currency. It was created in 2009, by an anonymous founder or group of founders... More to decentralize the economy, and banks weren’t big fans of the idea. But over time, traditional financial institutions began to recognize the benefits of blockchainBlockchain is a type of database storing an immutable set of data, verifiable to anyone with access to it —through... technology. In fact, Bitcoin (BTCAn abbreviation for Bitcoin.), Ethereum (ETH), and the rest of the crypto industry are becoming increasingly popular among institutional investors.
The way in which institutional investors began to believe in crypto was radically changed by the COVID-19 pandemic. Thus, today we see an institutional adoption that resists the crypto winter that the industry is currently facing.
The beginnings of institutional adoption (2009-2014)
In the first years since the birth of Bitcoin, those who owned the cryptocurrencyA digital currency running on a blockchain and built with cryptography. Contrary to central-bank issued currency, cryptocurrency issuance rules are... More saw it as a promise of innovation in the financial sector and not as an investment vehicle. Microsoft, Paypal, Dell, Expedia, and Newegg were the pioneers in the institutional adoption of crypto.
Despite this, in February 2014 the largest Bitcoin exchange in the world, Mt. Gox filed for bankruptcy. This motivated the big players in the market to prefer OTC brokers to carry out their operations instead of exchanges.
Therefore, in September 2014, TeraExchange received approval from the US Commodity Futures Trading Commission (CFTC) to create the first OTC product based on the price of Bitcoin. With this milestone, many more people were able to purchase Bitcoin through regulated OTCs.
Likewise, in 2014 Ethereum developers published what would be one of the most successful ICOs, raising $18.30M. And it is that, although it was not revealed if the identity of the Ethereum whales were institutional investors, in 2019 it came to light that by 2016 only 376 entities owned 47% of the ETH in circulation.
Later, in 2015, Hyperledger, an open-source project created by the Linux Foundation, was released. His initial goal was to support global business transactions for large institutions such as IBM, Intel, or SAP SE.
The ICO boom (2017-2018)
It was in 2017 that crypto in general gained popularity, also among institutional investors. Thanks to the ICO boom, Bitcoin rose from $1k at the beginning of the year and closed close to $20k in December.
But, Bitcoin was still considered a dangerous asset back then. In fact, in March 2017, Forbes dubbed the cryptocurrencies as ‘Blood diamonds’. With that name, they were referring to the fact that supposedly only drug traffickers and extortionists used Bitcoin. Likewise, the portal also indicated that the increasing value of the asset was due exclusively to these illicit purposes:
…the only reason Bitcoin has value to anyone is because of the underlying value as a medium of exchange for lawbreakers. If we could flip a switch and eliminate all illegal uses of Bitcoin, there would be nothing left of the cybercurrency.Jason Bloomberg, Forbes.
Likewise, in 2017, various industry players began to request the launch of spot Bitcoin ETFs. But, the SEC rejected their proposals, claiming that none of the offers could disprove market manipulation.
Despite this, 2017 was an excellent year for institutional investors in the crypto industry. Therefore, CNBC reported that 124 crypto-funds have about $2.3 billion in total assets under management for October.
2017 was also the launch of the Enterprise Ethereum Alliance, comprised of a group of transnational companies from the energy sector (oil and gas) and the financial and software development sectors. This alliance sought to develop technology and applications on the Ethereum blockchain for the respective business activities of its members.
Among the founding companies were British Petroleum, JP Morgan bank, Accenture, Banco Santander, BBVA, Intel, ConsenSys, Thompson Reuters, and Microsoft.
The COVID-19 pandemic marked a before and after for institutional investors in the crypto industry. To face the crisis caused by the blockades generated by the pandemic, the central banks initiated protocols to stimulate the economy, reducing interest rates to zero. In this sense, Bitcoin increasingly positioned itself as a refuge against inflation.
Furthermore, another June 2020 survey revealed that 36% of institutional investors in the US and Europe had become involved with crypto. And then in the second half of the year, many institutional investors such as financial advisers, family offices, hedge funds, and even foundations announced Bitcoin purchases.
Likewise, the 2021 bull run caused public pension funds and other large investors, notably insurance companies, to dive into the crypto industry.
Despite its setbacks, cryptocurrencies have managed to convince many. Even some of those who have spoken out against cryptocurrencies in the past have changed their minds over time. The CEO of the business intelligence giant MicroStrategy, Michael Saylor, is one of them. In 2013 published a tweet in which he predicted a disastrous future for crypto. But, in August 2020, the company acquired 21k BTC worth $250 million.
Institutional Investor Demand Amid Crypto Winter
And to top it off, despite the crypto winter that followed Bitcoin’s ATH in November 2021, institutional investor demand has still remained strong.
In fact, by November 2022, despite Bitcoin going through a crypto winter, another survey revealed that most institutional investors had increased their allocations in those last 12 months. Thus, about 140 investors had about $2.6 trillion in assets under maintenance as of November of last year.
Though, not everyone agrees with these figures. According to other researchers, the last quarter would have been the one with the lowest institutional investment in the crypto market in the last two years. In 2021, according to S&P analysts, investment in cryptocurrencies by these investors stood at $13.65 billion, while as of December 16, they had only invested $917.8 million in the fourth quarter.
The future of institutional adoption
Although this article focuses on institutional investment, the truth is that retail investors also have greater opportunities today. Thus, there are options such as PayPal, Venmo, Alfacash, and other platforms so that investors of all kinds can immerse themselves in the crypto market without problems.
But, in the next seven years, institutional investors could displace retail investors in the crypto market. So predicts recent research from Grayscale.
For those surveyed, who have some $182.5 billion of assets under management, the digital payments sector will grow strongly. In 2021, on-chain payments reached $25 trillion in various cryptocurrencies. But, 70% of investors surveyed believe that by 2030 on-chain payments will be worth more than $30 trillion.
Digital mining, cloud computing, and crypto regulation will pave the way for institutional investors. But, only time will tell how accurate this is, especially if the signs of recovery for the market continue in 2023.
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