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Why are institutional investors betting on cryptocurrencies?

Why are institutional investors betting on cryptocurrencies?

We have no doubt that the market for Bitcoins and other cryptocurrencies is flourishing. Just go on the internet and you will bombarded with countless reports and documentaries that have explored the subject and aroused the interest of individual users.

However, recently, another group has been dedicated to the acquisition and mining of digital coins on a large scale: institutional investors. Who are they and why is their interest in this market interesting?

Let’s dive deeper into this as we will discuss;

  1. Who are these institutional investors?
  2. How do they act?
  3. What is the extent of interest in cryptocurrencies?
  4. What are the specific reasons for betting on crypto assets?

4.1. Improvement in custody services;

4.2. US SEC position on crypto assets;

4.3. Diversity of action;

4.4. Proven performance of crypto assets;

4.5. Favorable regulations are beginning to emerge around the world.

 

1. Who are these institutional investors?

These stakeholders are the major players in the international financial market. If this international market was a chess board, these investors would be the queen piece. They are, for example, large companies, robust investment funds, hedge and insurance companies. Their actions influence the entire global economy, in addition to having the best professionals in this field working for them.

Furthermore, it is vital to notice that the Central Banks of each country, can be considered to fall within this group of stakeholders. Although they are not institutional investors  themselves, their strategies have a major impact on the foreign exchange market.

The great peculiarity here is that international investors are not represented by individual names. People and news agencies tend to associate great wealth with individuals, but the truth is that the big names in this market are companies. We can mention some of them:

  • JP Morgan Chase & Co, a bank based in the United States;
  •  Merrill Lynch & Co, also North American;
  • Barclays, an institution based in England. Famous for sponsoring the Premier League, the local football league;
  • AXA, a French insurance company.

 

2. How do they act?

Institutional investors are always looking for liquidity, so it is natural that they turn to other options to diversify their earnings. The interesting thing is that these companies operate using advanced technology, with robots and high-level programming to achieve positive results.

In addition, these investors also use the so – called iceberg orders – thousands of small orders separated into small lots in order to diversify their operations, both in the stock market and in the cryptocurrency networks.

Thus, they manage to produce on a large scale, but without losing discretion when it comes to acting. An example is the use of robots: with the massive application of these machines, companies place their orders at the top of the order book.

In this way, institutional investors are able to “hold” prices in the short term and guide more modest traders to follow their guidelines. Hence, it is very obvious that size is their economic power as they operate with a large portfolio of stocks and various applications.

As these institutions already have impressive liquidity, they can afford to prioritize long-term operations, which pay higher dividends. Moreover, the teams are always top-notch, with an enviable knowledge of the business world as a whole.

Although many people, even small investors, see these companies as damaging to the economy, the truth is that they are essential to making money go around the world. This is due to the fact that they do not hesitate to take daily risks, stabilizing the price of assets and guaranteeing the order of the financial market.

We speak of the economic power of institutional investors to facilitate the understanding, on the part of the reader, about the reasons that lead these entities to seek the cryptomarket. If even great actors are interested in currencies, it is a sign that Bitcoin, for example, is here to stay and thrive.

3. Why are they interested in cryptocurrencies?

With high-level global players looking at the cryptocurrency market, the trend is for networks to get even more liquidity and each unit, whether Bitcoin or any other, is increasingly valued.

Just read a recent statement by Mark Yusko, a veteran of hedge funds and CIO at Morgan Creek Capital, to get an idea of ​​the interest of big investors in virtual currencies. Asked how to proceed with options like Bitcoin, he was emphatic: “buy!”.

His statement complements that of another important leader. Anthony Pompliano, an investor involved with Morgan Creek, said that US pension funds will not be able to make all payments due to their clients in the future. Thus, he advises pensioners to purchase Bitcoin units. Even with the volatility, Pompliano believes that cryptocurrencies are a much safer financial application in relation to pension funds, for example.

Another factor that attracts these institutions to this market is the possibility to avoid the associated risks. The main modality used by these financial agents is the over-the-counter market when assets are purchased outside the stock exchanges.

This goes against one of the main differentials of the creation of Bitcoin: eliminating excess intermediaries and speeding up transactions. This reason, added to the good quotations of currencies like Bitcoin, constantly fluctuating between about 10 and 20 thousand dollars, are quite stimulating for the market.

In 2018, even institutional investors surpassed individuals with high purchasing power when buying cryptocurrencies. One of the factors that brought about this change was the dynamics of over-the-counter markets, which allows large orders to be placed

 

4. What are the specific reasons for betting on crypto assets?

Now that we know more about the interest of these agents in the virtual currency market, it is time to understand what has been motivating more and more institutional investors to continue populating the crypto market.

4.1. Improvement in custody services

Coinbase, a digital currency exchange based in San Francisco, announced in 2018 that it was still considering including cryptocurrencies in its custody services. The intention was to ensure that institutional investors were able to store their assets safely.

In August 2019, the company’s CEO, Brian Armstrong, confirmed that Coinbase was already receiving up to 400 million in weekly “cryptodeppositions“. He said, stated that this security infrastructure model for digital currencies was an important step to strengthen this market.

Coinbase’s national intention occurred at the same time that the North American bank Goldman Sachs also disclosed its intention to act as custodian of these assets. In October 2018, the institution founded the BitGo service, in a joint effort with Mike Novogratz

4.2. US SEC position on crypto assets

The U.S. Securities and Exchange Commission has positioned itself in favor of cryptocurrencies. This is utterly important for the future of this market as a whole since the US is still the number one economy on the planet.

In addition, Kim-Wai Lau, CEO, and director of the Fatfish Blockchain group, a Singapore-based company and a centerpiece of the global cryptocurrency industry, said in a recent interview that the second wave of these digital assets was made possible by interest institutional investors. According to him, the SEC is increasingly open to cryptocurrency.

4.3. Diversity of action

Cryptocurrencies draw the attention of major players in the market, such as the aforementioned Goldman Sachs, as well as institutions like Fidelity and Blackrock. Most interestingly, they started to develop their own cryptocurrency products and Blockchain technology.

The Goldman group is even close to creating its own currency. Fidelity debuted an encryption fund in 2017 and is actively building teams for encryption custody and other related services. Blackrock, the world’s largest investment management company, has already announced its plans to invest in the future Bitcoin market.

4.4. Proven performance of cryptocurrencies

Many cryptocurrencies performed quite poorly in 2018, with some losing up to 90% of their market value. However, the performance already shown by this market did not discourage institutional investors from continuing to invest.

Even Mark Mobius, investment legend and co-founder of Mobius Capital Partners, was convinced. The businessman has already said that cryptocurrencies were a fraud in the past. However, in May 2019, he had to give a hand and hope that these assets will be “alive and well” in the future.

But what caused this great enthusiasm on the part of institutional investors? It may be because of Bitcoin’s value, which returned to be worth a lot in 2019 and attracted the greed of the biggest companies. Not even Facebook and Twitter missed the currency’s continued performance.

4.5. Favorable regulations begin to emerge around the world

Finally, cryptocurrencies can no longer be ignored, even by governments. Thus, several countries are recognizing the need to develop structures and regulatory frameworks for these assets.

What was missing was the recognition of other first-world economies, but this is already happening on a global scale. Bitcoin, for example, is already a legal currency in Japan and the country has already validated the work of several exchanges and trade platforms.

Switzerland is another important nation for this market, since most banks and financial institutions are present there. In 2019, the first “crypto banks” appeared in the country, consolidating the tradition of zeal. In fact, in August 2019, FINMA (national market surveillance authority) issued guidelines to combat money laundering via virtual currencies.

As we could see in the article, institutional investors are increasingly interested in cryptocurrencies. This only reinforces the fact that some of the most successful companies and funds in history are also able to visualize the value of this market.

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