The long game: Institutional interest in crypto is just getting started

The old adage “The crypto market is not for the faint-hearted” was put on full display recently when the total market capitalization of the industry dipped to a relative low of $1.75 trillion on Sept. 20, only to make a strong comeback. Despite all of these fluctuations, however, demand from institutional investors remains strong, with reports suggesting that big-money players continued to recently “buy the dip,” especially on the heels of China’s most recent blanket ban that saw bears take control of the market, albeit briefly.

To further elaborate on the matter, a recent CoinShares report revealed that over the last week of September, digital asset investment products generated $95 million worth of inflows for institutional crypto investment products — with Bitcoin (BTC) and Ether (ETH) leading the way with $50.2 million and $28.9 million worth of inflows, respectively. In fact, on average, the last 30-day period has seen inflows to Bitcoin products surge by a whopping 234% week-over-week.

It also bears mentioning that since April, United States investment bank Morgan Stanley has doubled its total number of Grayscale Bitcoin Trust (GBTC) shares owned, something that came to light when the financial behemoth filed a report with the U.S. Securities and Exchange Commission (SEC) on Sept. 27. 

Lastly, investment management giant Ark Invest — helmed by CEO and crypto bull Cathie Wood — has also been on a GBTC buying frenzy, with the firm having acquired more than 450,000 GBTC shares via two different separate purchases recently, bringing its total haul to a sizable 8.3 million GBTC shares.

Institutional demand grows

To get a better idea as to how active institutional players have been in terms of their crypto exposure, Cointelegraph reached out to Luuk Strijers, chief commercial officer for crypto options exchange Deribit. He highlighted that large banks like Morgan Stanley, Citi and Goldman Sachs are starting to offer their clients a wide array of digital assets, adding:

“We don't see them becoming active on offshore derivatives platforms yet. We do, however, see the tier-two firms in size, asset managers and hedge funds becoming more and more active either actively investing/trading or alternatively hedging their VC investments.”

To support his claims, he pointed out that around 20% of Deribit’s options volume is nowadays being transacted as an over-the-counter block, with this number previously hovering around the 5%–10% range. “Due to the size of these transactions, which clearly imply that institutional parties are involved, these transactions are better executed in one block versus multiple transactions on-screen,” he explained. 

Lastly, Stijers pointed out that traditional financial institutions prefer trading futures and options over perpetual offerings, which are usually seen as short-term exposure products due to the unpredictability of their funding. “Deribit has larger futures open interest versus many of our peers since around 80% of our volumes is institutional driven,” he said.

Playing the long game

Elena Sinelnikova, co-founder and CEO of Ethereum layer-two rollup platform Metis, told Cointelegraph that more often than not, retail investors ignore periods of consolidation, directing their attention to the crypto industry only when the market is pumping. On the other hand, institutional investors know that the best time to stack up is when the market drifts lower and/or stands still, suggesting a more long-term outlook on their part. She said:

“We've been through enough market cycles to know that the type of pullback we've seen over the past few months often comes right before a big uptrend. While no one can predict the future (in crypto or otherwise), institutions are using this quiet period to load their bags, in anticipation of another big leg up.”

Additionally, Sinelnikova pointed out that investors need to remember that different stages of the market can produce dramatically different results. “Keep an eye on Bitcoin dominance data to see whether it’s BTC or altcoins (or both) that drive the next move up for the market,” she stated.

A somewhat similar outlook is shared by Douglas Horn, chief architect of the scalability-focused blockchain network Telos, who told Coitnelgraph that institutional investors can be likened to supertankers — i.e., it takes them a lot of time and energy to get them moving, but once they do, it's just as hard to stop them again. He said:

“Now that they have made the decision to get into crypto, they are not going to be dissuaded by some temporary volatility. If anything, they are going to be less flappable about accumulating crypto during downturns. By the time these investors bought their first Bitcoin, they had surely spent years assessing and strategizing their entry and objectives. They operate very differently than typical crypto investors and traders.”

Horn stated that as things stand, the groundwork has already been laid by firms like MicroStrategy for others to follow and that a deluge of newer institutional investors are close to wrapping up their own long due diligence processes assessing the long-term viability of investing in the digital asset market.

Not everyone agrees 

Philip Gunwhy, chief marketing officer for NFT ecosystem Blockasset, told Cointelegraph that while Bitcoin’s embrace by institutional investors has been progressive over the past many months, some are still cautious, especially as the regulatory climate surrounding this nascent industry has continued to heat up. In his view:

“The potential buyers of Bitcoin are not a coordinated effort by these institutional investors, and as such, one cannot tell with certainty the buying patterns of these investors, except when announced. While Morgan Stanley recently doubled down on its Bitcoin investments, many institutional investors are choosing the option of venture capital funding, injecting capital in companies offering Bitcoin-related services.”

Despite Gunwhy’s assertions, Wes Levitt, head of strategy for decentralized video streaming platform Theta, told Cointelegraph that institutional capital is still pouring into the blockchain space, as evidenced by the amount of crypto venture capitalist (VC) funding in the first half of 2021, which exceeded $17 billion. He said:

“It could be that interest has waned somewhat in direct exposure to BTC/ETH with the May crash no doubt spooking many traditional investors, but according to reports, institutional flows are still net positive for the month of September. As always, the reports of crypto’s death are greatly exaggerated.”

Looking ahead

To get an idea of where increasing institutional crypto adoption may be heading, Cointelegraph spoke with Joshua Frank, co-founder and CEO of TheTIE, a crypto and blockchain analytics provider. In his view, the demand his firm is witnessing from traditional firms has been staggering. 

“There are dozens, if not hundreds, of billion-dollar prop trading firms, hedge funds and other asset managers that have recently made their first crypto trades,” Frank said.

He further stated that while there have been some high-profile announcements of funds investing in crypto, there are many more of these developments taking place behind the scenes, of which the public has no knowledge. Frank said that usually, such operations start simple — i.e., a fund does a cash-and-carry BTC trade as a proof-of-concept using partner capital — and grow over time, adding:

“We are finding these funds falling further and further down the rabbit hole. We have at least 5–10 clients which are the top 50–100 largest hedge funds that are actively hiring crypto teams. That’s all I can say publicly, but these funds are our clients so we are seeing it in real-time.”

Lastly, according to a recent survey, a growing list of traditional financial entities are increasingly looking to move into the realm of digital asset trading/investments. Per the report, some 62% of global institutional investors with no current exposure to cryptocurrencies stated that they are looking to get into the crypto market within the next 12 months or so.

The survey considered the views of 50 wealth managers and 50 institutional investors based out of different countries including across the United States, the United Kingdom, France, Germany and the United Arab Emirates. “There is no doubt that the crypto assets market is becoming more mainstream in the institutional and wealth management sectors,” the report stated.

As the crypto industry continues to grow from strength to strength — both from an infrastructure as well as a regulatory standpoint — it will be interesting to see how the above-mentioned trend of increased institutional adoption plays out.