Why institutions suddenly give a damn about Bitcoin

Published at: Nov. 28, 2020

Without a doubt, Bitcoin (BTC) has become an increasingly popular asset to own among institutional investors. By the end of the second quarter of 2020, Fidelity reported in a survey of almost 800 institutional investors that 36% owned crypto assets. A separate survey, conducted by crypto asset insurance company Evertas, shared that respondents believe hedge funds will increase their crypto holdings drastically. It also projected that 90% of institutional holders of crypto assets expect to invest even more in Bitcoin this coming year.

From MicroStrategy and Grayscale to JPMorgan and Goldman Sachs, Bitcoin has solidified its place in investment portfolios as the asset to hold as a hedge against inflation and currency devaluation. However, beyond that, there are real technical reasons why institutional investors are becoming more and more bullish on Bitcoin, with some predicting it will reach $1 million by 2025.

While the future value of Bitcoin may continue to be a topic of debate, the reality is that investors and financial institutions now believe “holding BTC might prove to be less risky than not having Bitcoin exposure at all.” In fact, according to a crypto research firm Messari, more than 81,000 BTC belongs to “the treasuries of publicly traded companies.”

In total 81,154 BTC, or 0.5% of all BTC in circulation is held in the treasuries of publicly traded companies. https://t.co/Rx6Z8a5NqN pic.twitter.com/DHB7N2dm8J

— Messari (@MessariCrypto) November 11, 2020

But, what spurred the Bitcoin rally of 2020, and what are institutional investors seeing in Bitcoin now that they didn’t see before?

Bitcoin’s borderless network and blockchain technology

Bitcoin acts as a non-sovereign currency that is uncorrelated with other asset classes. For institutional investors, it serves as a diversification tool to hedge against highly correlated markets such as the S&P 500, Nasdaq and the dollar. Two major areas where Bitcoin and blockchain technologies offer the most value to institutional investors include secure, borderless transactions and access to new opportunities that can’t exist in traditional financial markets.

Bitcoin’s innovative technology including smart contracts, borderless payments, lower fees and faster, more secure transactions are the catalyst that will prepare us for a future where national currencies break from their current physical form and become digitized.

With U.S. dollar inflation on the horizon, notable investors like Ray Dalio and Paul Tudor Jones are also beginning to “like Bitcoin more and more” and have identified it as the “best inflation hedge,” comparing it to gold and copper. As banks and technology providers continue to invest heavily in research and development projects related to verifying and recording finance transactions, such as JPMorgan’s new business blockchain and digital currency house Onyx, we will continue to see institutions increase their presence within the space.

The introduction of quality custody solutions

Custodians are used by financial institutions such as hedge funds and mutual funds, who are obliged to hold clients assets with a professional custodian for regulatory purposes.

Previously, institutional investors were wary of Bitcoin and other cryptocurrencies due to the regulatory environment, and until recently, the wider crypto ecosystem was also severely lacking in institutional-grade crypto asset custodial solutions. With an urgent need for adequate custodians to secure the growing amount of crypto assets and an increase in clarity around regulatory guidelines for operating and investing in cryptocurrencies, a sector of institutional-grade custodian solutions was born.

Anchorage, a newly-launched crypto custody firm backed by Andreessen Horowitz and a number of other prominent blockchain-focused venture capital firms, is one of those solutions. It was incorporated with the ethos to provide a crypto-native digital asset custodian for institutional investors. Bank Frick, a Liechtenstein-based private bank, has made it a priority to offer a range of blockchain banking services, including token launch support, crypto trading and digital asset custody. The regulated bank’s services are targeted at professional market participants and financial intermediaries in Europe.

Banks have also received the green light to custody crypto companies. In a note to the public, senior deputy comptroller and senior counsel of the U.S. Office of the Comptroller of the Currency Jonathan Gould wrote back in July:

“We conclude a national bank may provide these cryptocurrency custody services on behalf of customers, including by holding the unique cryptographic keys associated with cryptocurrency.”

This marked a major industry-wide development allowing regulated financial institutions to hold the same safekeeping services previously exclusively held by specialist firms.

Banking custody options coupled with the emergence of crypto insurance companies like Paragon International Insurance Brokers, which was recently integrated into Bitstamps offerings, are providing policies for digital assets such as Bitcoin to be protected both online and offline while covering a number of crime-related circumstances.

The adopted regulatory and custodian solutions provide security for institutional investors who may have otherwise been skeptical. They are also helping hold cryptocurrency exchanges to a higher standard, encouraging them to protect investors’ money from theft or misappropriation. This has become an important catalyst for making digital assets more attractive to institutional investors and funds.

Institutional demand for Bitcoin

As the crypto market sees an uptick in institutional investments, with large purchases being completed by more and more firms, it has correlated into a rally in the markets.

According to a report from cryptocurrency derivatives platform Zubr, institutional investors are moving toward holding Bitcoin in “physical” form instead of cash-settled futures. The integration of institutional investors into the crypto ecosystem and their interest in holding is a positive sign for mainstream adoption. The similarities these investors share with holders indicate an easy transition from traditional finance to the digital economy, instilling trust in Bitcoin and representing an understanding and belief in the technology.

Serving both parties is also the high-potential upside that comes with decentralized finance, which has introduced a flow of new business streams, products and services. Services from the likes of Maker and Compound allow individuals to take out loans of any size in a matter of minutes without having to disclose their identity to a third party, while the yields associated with new DeFi products are resulting in gains that are higher than savings accounts, certificate of deposit accounts and other traditional options.

The potential benefits of the DeFi revolution are just one more reason the dynamic of cryptocurrency is shifting into what believers have wanted all along — a digitized, borderless asset.

The proof is in the numbers as institutional investors come for crypto

According to a recent survey by Fidelity Asset Management, 80% of surveyed institutions find investing in digital assets appealing, while the number of Bitcoin addresses has been steadily increasing. Addresses holding above 1,000 and 10,000 Bitcoins have also increased considerably. Coupled with declining balances on exchanges, this suggests that whales and larger investors are choosing to hold Bitcoin.

Additionally, a report by Big Four audit firm KPMG found that major banks, asset managers and qualified custodians are launching a new wave of institutional-grade crypto products and services. The institutional investments into cryptocurrency confirms trust in the digital asset from a significant place of power.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

Paolo Ardoino joined Bitfinex at the beginning of 2015 and now serves as its chief technology officer. After graduating from Genoa’s Computer Science University in 2008, he started working as a researcher for a military project focused on high availability, self-recovering networks and cryptography. Interested in finance, Paolo began developing financial related applications in 2010 and founded Fincluster in late 2013.