The Long Game: Institutional Interest in Crypto is Just Getting Started

The stock market is ridden with both institutional and retail buyers. While they often have different views of the market, the increased buying activity of the former is perhaps a sign of a good buying opportunity. This article is not about the stock market. It’s more about another financial instrument that has been making waves in both popularity and returns. The cryptocurrency market has been full of ups and downs, with both having a relatively fair time to show their abilities. Crypto investors that entered the year with optimism based on the bull run of late 2020 had their hopes dashed with sudden dips, China’s ban, global warming risks, and the never-ending shouts of crypto bears. 

Bitcoin ended up being 2021’s most profitable asset class, beating the likes of short-term bonds, REIT, corporate bonds, and even the stock market. There are many reasons for this, but primarily, we can’t mention anything without giving due credence to crypto wealth investors or, better put, institutional buyers for their never-ending dip purchases. 

A good view of this is seen on a Coinshares report showing institutional buying to the tune of $95 million. That was double the next highest cash inflow in cryptocurrency over a 30-days span. $50 million of the buying went into the Bitcoin cryptocurrency while $28 million was pumped into the largest altcoin by market Cap, Ethereum. Most of these purchases took place on popular centralized crypto exchanges, with Coinbase, Binance, and Redot leading the way. 

Apart from directly buying cryptocurrencies on exchanges, some crypto investors bought exposure to cryptocurrency via Trusts. Before the approval of the first crypto Exchange-Traded Fund, crypto trusts offered investors a fund-like environment to cryptocurrency. 

A prominent Investment bank, Morgan Stanley, doubled the number of crypto shares it had with Grayscale Bitcoin Trust. This would have been hidden from the public if not for the cliche company quarterly report required by the Securities and Exchange Commission, which was released a few days before the end of September. 

Another of the institutional crypto investors with massive exposure to the Grayscale Bitcoin Trust is the seasoned investor; According to a zacks investment research review, Cathie Wood and her ARK investment management firm. She owns a massive 8.3 million shares of Grayscale Bitcoin Trust shares ranking it as the 24th largest stock in her portfolio. 

China’s crypto attack

It came as a usual threat then ended up dazzling everyone as China took the most drastic action against cryptocurrency mining. While we would not go into the details of what ensued and the power play at work, mining activities have been moved to the United States and Europe. With crypto mining activities closer to where the money is (many institutional buyers), it is only a matter of time before we see many more ‘whales’ in the crypto ocean. 

Institutional demands grow

In a bid to understand the institutional buyers’ activities in the crypto market, we interviewed senior authorities at Derbit, Redot.com, Telos, and Layer-2 platform, Metis. A few things we understand from their words include:

• Retail investors seem to be uninterested in consolidation periods, opting to buy during their perceived lows or on the way up. Institutional investors have a different outlook. They understand that the long-term outlook of a token is seen during times of consolidation, so they double up on their purchases during pullbacks or consolidation.
• Institutional investors hardly move in the market, but once they do, it would take a lot of effort to stop them. After a long period of skepticism, we’re seeing an era of massive exposure by crypto wealthy investors to the cryptocurrency market. This move is not unplanned, and it took lots of critical thinking and strategic analysis to reach the conclusion of cryptocurrency exposure. You don’t expect them to be fazed by volatility. 
• There is growing skepticism with some big institutional investors because of the regulation crises surrounding cryptocurrency. The SEC has clearly pointed out that there are no plans to ban cryptocurrency activities in the country, but following China’s hard fist on crypto mining, the pressure of mining might seem too much for the US and Europe to handle. To mitigate this risk, large venture capital funding is going to companies offering Bitcoin-related services. 
• The market crash that happened in May might have fuelled the institutional skepticism surrounding Bitcoin and other digital currencies. Most institutional buyers are not used to seeing 30% corrections without Wall Street going nuts like it is in the stock market, and despite them having alternative buying plans, they’ll need some time to adjust to the crypto market’s trademark; Volatility. 
• Investors prefer long-term exposure. Hence crypto trading on futures and options are favorites to many of them.

The future of crypto

Having crossed the $1Trillion mark for the second time in its history, the Bitcoin cryptocurrency is paving the way for other cryptocurrencies to follow. Many of these altcoins have better use cases and would be relevant in several facets of life. Still, the contest between retail and institutional investors is not one that’s ending soon. The institutions have the money; retails have the numbers. A recent research conducted by Cointelegraph showed that 62% of the interviewed institutional investors who had no exposure to cryptocurrencies planned to get their first tokens in less than 12 months. Most improvements will happen behind the scenes, but from what we can see, hedge funds will want to have a big share of the cryptocurrency market cap.

Beyond the benefit of the doubt, the cryptocurrency world is growing in leaps and bounds, taking other good investment classes on a ride with it. It has become legalized as a means of value exchange in some countries of the world, with many others posed to follow suit. 

As the crypto market gains relevance both at the infrastructural and regulatory standpoint, it is only a matter of time before cryptocurrencies get mainstream and go head-to-head with bonds, stocks, and treasury bills as a government-recognized asset.