While crypto has sometimes been seen as a renegade movement, the recent influx of institutional investment has turned the tables on that view.
In the wild world of crypto, fortunes are made overnight, memes are worth millions, and Elon Musk tweets can make or break your portfolio.
But amidst all this chaos, two things stand out: the breakneck pace of change and the growing influence of institutional investors.
Now, Wall Street suits are rubbing shoulders with crypto cowboys, and the game has changed forever. But what does this mean for the scrappy startups that helped build the crypto world?
Buckle up as we dive deeply into the world of institutional crypto investment. From hedge funds to billionaires, we’ll see who’s running the show: retail investors, venture capitalists, or institutional giants.
We will also explore how institutional adoption is changing privacy, security, and decentralized governance and how the rise of web3 protocols is shaking up centralized platforms. Let’s find out.
The rise of institutional investors in crypto space
Firstly, let’s define what we mean by institutional investors. Institutional investors, also known as “whales” in the crypto world, are entities like hedge funds, pension funds, and banks with huge pockets of cash to invest.
You may be wondering why all these fancy institutions are jumping into the crypto game. Well, it’s all about the bling.
Institutions are always on the lookout for opportunities to make a pretty penny. And with the insane volatility in the crypto market, some serious cash must be made. It’s like a never-ending rollercoaster ride – but instead of getting sick, you’re getting rich.
But let’s not forget about the elephant in the room – security.
Crypto may be digital, but that doesn’t mean it’s not valuable. Institutions need to know that their investments are safe and sound. And with the development of custodial solutions, they can rest easy knowing their money isn’t going anywhere.
Plus, with more and more countries and regulators giving the green light to digital assets, institutions are feeling more confident about diving in. They don’t want to miss out on the action and potential returns, and who can blame them?
As more and more investors pile into the crypto market, institutions can’t afford to sit on the sidelines. They want a piece of the pie too, and they want to ensure they get it before it’s all gone.
In the end, the rise of institutional crypto investment is a testament to the power of money. As long as there’s money to be made, institutions will find a way to get in on the action.
Changing dynamics of the market
With their deep pockets and vast resources, institutions can cause some major shifts in the market dynamics. Here’s the rundown of how institutional investment affects the crypto market and what changes we’ve seen as a consequence:
- Grayscale Investments saw its assets under management (AUM) skyrocket from roughly $2 billion to over $43 billion in December 2021, thanks to its cryptocurrency investment trusts.
- BlackRock, managing $8.6 trillion in assets, partnered with Coinbase in August 2022, allowing clients of BlackRock’s Aladdin investment management platform to trade digital assets, starting with bitcoin.
- Despite market turbulence, a November 2022 Institutional Investor Custom Research Lab survey revealed that 58% of investors with current stakes in digital assets planned to increase their holdings over the next three years.
- In 2022, Fidelity’s survey of over 1,000 institutional investors showed that 51% had a favorable view of digital assets, compared to 45% in 2021.
Institutional investors can add a lot of liquidity to the market with their deep pockets and sophisticated trading strategies. That means more money flowing around, which can help reduce transaction costs and make it easier for everyone to buy and sell assets.
As a result, more investors can buy and sell digital assets with greater ease and efficiency, leading to improved price discovery.
Speaking of prices, institutional investment has also significantly affected volatility. Contrary to popular belief, institutional investment has contributed to a decrease in price swings.
In fact, the above chart has shown that bitcoin’s volatility has been on a steady decline since 2018, and the influx of institutional investors is a key factor in this trend.
This means digital assets are becoming more stable, reliable, and predictable – characteristics that make them more attractive to mainstream investors.
Market cap augmentation
Big money means big growth in the crypto market! From 2018 to November 2021, it was institutional investment that pushed BTC and ETH to their record-breaking highs. No secret there, but definitely a trend to watch!
With the support of institutional investors, digital assets are becoming more widely accepted and recognized as legitimate investment vehicles.
This is evidenced by the increasing number of publicly-traded companies adding cryptocurrencies to their balance sheets.
In 2022 alone, several hundred large companies added bitcoin to their treasuries, including big names like Tesla, MicroStrategy, Square, and now even countries like El Salvador.
Influence of different players in the crypto space
Let’s take a closer look at how different players impact the world of crypto.
First up, we have retail investors. These are the everyday people like you and me who are getting in on the crypto action. They may not have the same level of expertise or resources, but they make up for it in sheer numbers.
Retail investors bring liquidity to the market, like pouring gasoline on a fire – it can either burn out of control or create a beautiful blaze. The jury’s still out on which one it’ll be.
Next, we have venture capitalists. These are the big dogs of the investment world, seeking out the next big thing and pouring truckloads of money into it.
Think of venture capitalists as the cool kid in high school who always had the latest and greatest gadgets. They have the funds to take risks and the connections to make things happen.
The downside? They can be a bit like a rollercoaster – up one minute, down the next.
Last but not least, we have institutional investors. They’re the steady and reliable force that keeps the market stable. They have the expertise and resources to make smart investments and weather volatility.
However, they can also be slow to move and risk-averse. It’s like driving a tank – slow, steady, and hard to steer, but it gets the job done.
The cumulative effect
So, what’s the impact of these different types of investors on the crypto market?
It’s like a game of Jenga – each piece is important and has the potential to make the whole thing come crashing down.
Retail investors bring liquidity and democratization but also greater risk.
Venture capitalists bring excitement and innovation but also greater volatility. Institutional investors bring stability and credibility but also greater caution.
It’s a delicate balance and one that’s constantly shifting.
Which institutions are topping the charts?
Grayscale is a digital asset management firm that offers investment products that give exposure to cryptocurrencies such as bitcoin, ethereum, and more.
According to CoinGlass, its flagship product is the Grayscale Bitcoin Trust holds over 600,000 BTC, currently worth $13.69 billion.
Grayscale has been instrumental in bringing bitcoin into the mainstream, as its products are available to institutional investors, including pension funds, endowments, and family offices.
MicroStrategy is a software company that has become one of the biggest bitcoin holders in the world. The company has 132,500 bitcoins worth over $2.89 billion, making it one of the most significant corporate bitcoin investors.
Its CEO, Michael Saylor, is a vocal advocate for bitcoin and has been using MicroStrategy’s cash reserves to purchase bitcoin, seeing it as a hedge against inflation.
In early 2021, Tesla announced that it had purchased $1.5 billion worth of bitcoin, making it one of the most prominent corporate bitcoin investors.
The company has since sold a portion of its holdings, but the move helped to bring bitcoin into the mainstream and fueled a surge in its price.
Square is a payments company founded by Twitter CEO Jack Dorsey. The company has over 8000 bitcoins worth more than $175 million.
Dorsey has been a vocal supporter of cryptocurrency. It has also developed a product called Cash App, which allows users to buy and sell bitcoin.
The app has become very popular, with over 40 million active users, and has helped to increase bitcoin’s adoption among retail investors.
Fidelity is a financial services company that has been involved in cryptocurrency for several years. It launched Fidelity Digital Assets, a subsidiary that offers custody and trade execution services for cryptocurrencies.
Fidelity has also invested in a range of crypto-related companies and is seen as a leader in the institutional adoption of cryptocurrencies. Its involvement in the space has helped to increase bitcoin’s credibility and adoption among traditional investors.
What are the risks?
As institutional investments pour into the crypto space, it’s important to consider the potential risks and challenges that come along with this influx of capital.
Unexpected price swings: When institutional investors flex their financial muscles in the crypto market, it can lead to price swings so sudden they’ll make your head spin. Brace yourself because these big players can make moves that send shockwaves through the entire market.
Centralization: The flood of institutional money into the crypto scene could leave a select few holding all the cards, undermining the decentralization that crypto stands for. In short, we could be looking at a new kind of power grab.
Regulatory scrutiny: As big players start playing in the crypto sandbox, you can bet your bottom dollar that regulators will keep a watchful eye. This increased scrutiny could mean more hoops to jump through and stricter rules, which could drive up compliance costs for everyone.
Lack of transparency: When institutions enter the game, transparency often takes a back seat. Unlike retail investors who wear their hearts on their sleeves, institutions can keep their cards close to their chest, making it tough for others to make informed decisions.
Manipulation: With great power comes great responsibility – but that doesn’t mean everyone plays by the rules. Institutional investors have the power to manipulate markets and engage in sketchy schemes that can leave smaller investors reeling. Keep your eyes peeled for any shady business.
The road ahead
Institutional investment is bringing a blaze to the world of web3 and crypto. Not long ago, crypto was seen as fringe or even suspect. But now, with big names like Goldman Sachs, Morgan Stanley, and Fidelity getting involved, web3 and crypto are becoming more mainstream and accepted.
Of course, there are risks involved. Institutional investors can be fickle, and it could seriously impact the market if they decide to pull out. And there are concerns that their involvement could lead to a loss of decentralization and control over these technologies.
For the moment, institutional investment is playing a key role in shaping the future of web3 and crypto.