Institutional Investment: the Future of Crypto?
Big players turned their eyes to Bitcoin. Will it drive the cryptocurrency adoption? Another bull run? How are institutional investors reshaping the world of decentralized finance? Market insights by the BTCMEX Blog!
In traditional finance, an institutional investor is defined as an organization that pools together funds on behalf of others and invests those funds in a variety of different financial instruments and asset classes. They include banks, credit unions, insurance companies, pensions, hedge funds, Real Estate Investment Funds (REITs), investment advisors, endowments, and mutual funds.
Institutional investors are one of the most important participants in modern securities markets, and their most active development has been noted since the late 1980s. And today they are kindled by the cryptocurrency market and its opportunities. Institutional interest in digital assets is growing since last year as new players continue to enter the cryptocurrency space. Crypto derivatives market is seeing all-time highs in futures contracts’ open interest at entities such as the Chicago Mercantile Exchange (CME). Traders on the CME are generally institutions, not individuals, which is why this open interest in the digital asset market is noteworthy. Institutions that are already onboard and active on the CME are increasingly moving into crypto futures as an alternative asset class.
According to analysts, Bitcoin has become the true market beta. In traditional equity markets, beta is defined as a measure of volatility, or unsystematic risk an individual stock possesses relative to the systematic risk of the market as a whole. The difficulty in defining “market beta” in a space like digital assets is that there is no consensus for a market proxy like the S&P 500 or Dow Jones. Since space is still very early in its development, and Bitcoin is obviously dominating the market share it is often viewed as the logical choice for a beta, at least for now. Investor’s adoption is mainly focused on Bitcoin as the largest liquid digital asset.
Among the biggest projects focused on Bitcoin today there are Grayscale Bitcoin Trust, Galaxy Digital’s Bitcoin funds, Fidelity’s Bitcoin product, TD Ameritrade’s Bitcoin trading service on Nasdaq, New York Digital investment Group (NYDIG) Bitcoin Strategy Fund, and others.
Because of its programmed by Satoshi Nakamoto deflationary nature, Bitcoin has been recently recognized as a store of value. People generally want to hold assets with disinflationary or deflationary supply curves, because part of their promise is that they should store value well.
Supply-side services in digital asset networks are services provided by a third party to a decentralized network. Examples include mining, staking, validation, bonding, curation, node operation, and more, done to help bootstrap and grow these networks. Institutional incentivizing the supply side is important in digital assets to facilitate their growth early in their lifecycles, from initial fundraising and distribution through the bootstrapping phase to eventual mainnet launches. Facebook’s Libra and Twitter’s Bluesky initiative confirm that the industry is heading in the right direction.
The latest Fidelity Digital Assets survey found that of the nearly 800 institutional investors surveyed, almost 80% find something appealing about digital assets. Some institutions are wondering if it’s too early to be investing in the space, arguing that the cryptocurrency market is still very young and in need of education and regulations. Nevertheless, we see 2020 shaping up to be one of the brightest years on record for the digital asset industry. Industry analysts expect 2020 to be a year of accelerated industry maturation, regulations, and education.