Five reasons for growing institutional demand in digital assets
by Jacqueline Winter
Institutional demand for digital assets is growing as the current bull run and hype around cryptocurrencies continues.
According to a survey by fidelity digital assets, 6 in 10 investors believe digital assets have a place in their investment portfolio and 36% say they are currently invested in digital assets. Almost 80% of the institutional investors that participated in this study answered that there was something appealing about digital assets, with the three almost equally compelling characteristics across U.S. and European investors being: uncorrelated to other asset classes (36%); an innovative technology play (34%); and high potential upside (33%).
In a 2020 study from the world’s first crypto asset insurance company Evertas, 26% of participants answered that they believe that over the next five years, institutional investors will increase their investments in digital assets “dramatically”, while 64% anticipate “a slight rise.”
In Q4 2020 alone, institutions accounted for 93% of capital inflows, or $3 billion on Grayscale Investments.
When holding one digital asset, bitcoin, for a period of four years, its risk-adjusted returns in 2020 were higher than gold, U.S. equities, U.S. real estate, and other asset classes.
The world’s largest custodian bank and asset servicing company BNY Mellon even shared recently that their ETF (DSCVX) underperformed because more companies should have invested in bitcoin, not gold.
In 2020, there were countless headlines about significant investors, hedge funds and companies beginning to buy digital assets, or supporting the purchase of them through their platform. A few significant examples include PayPal, BlackRock, MassMutual, Paul Tudor Jones, Guggenheim Investments and Stanley Druckenmiller.
Another bank, JPMorgan intends to launch a “Basket of Companies with Exposure to Cryptocurrency” according to an SEC filing from early March 2021.
Others also made a move towards crypto: For example, PayPal offers crypto buying and selling services and will start offering crypto payment services to U.S. Customers while Mastercard plans to start supporting cryptocurrencies this year. Visa, the U.S. financial services company also announced on March 29, 2021, the company’s first settlement transaction is USDC, a stablecoin backed by the U.S. Dollar.“ The institutional space for crypto is going through a period of incredible growth. Many still don’t realize it. Coinbase Custody now has close to 200 institutional customers, onboarding hundreds of millions of U.S. dollars in crypto a week.” — Brian Armstrong, CEO Coinbase.
So what are some of the key reasons why more companies and institutions decide to invest in bitcoin recently?
One factor is that an increasing number of governments all over the world have or are working on implementing a legal framework for digital assets in recent years. This greater regulatory clarity around cryptocurrencies makes it easier for traditional companies to start investing with them – along with the current hype and attention around the crypto market, which reassures this decision.
Another important factor to keep in mind is that cryptocurrencies all over the world are becoming used more and more as their hype and popularity grows. In return, this means that there is also a larger need and customer base for crypto services.
BNY Mellon for example stated that the “growing client demand for digital assets” was one of the main reasons that led to them offering cryptocurrency services to their customers.
JPMorgan, one of the world’s largest banks, plans to launch a “Basket of Companies with Exposure to Cryptocurrency” as stated in an SEC filing from March 2021.
Goldman Sachs is offering bitcoin and other cryptocurrencies to its clients starting in Q2 2021, and Morgan Stanley announced that they would offer their wealth management clients access to at least one digital currency-related fund.
Other financial service providers like PayPal, MasterCard and Visa have also started offering crypto-related services recently, reacting to an increasing demand all over the world. Visa has even published their first settlement transaction with the stablecoin USDC in March 2021.
Bitcoin’s decentralized nature that allows for transactions to be made without any middleman, bank, or central authority also makes it a very appealing store of value for investors in countries that have an unstable or untrustworthy government, bitcoin and other cryptocurrencies are an appealing store of value due to their decentralized nature.
Alternative assets like bitcoin and other cryptocurrencies also provide an important way for institutions to diversify their investment portfolios.
Since bitcoin is hardly correlated with other assets in the traditional markets, it allows institutions to diversify their investments that are mainly composed of highly correlated assets. They also offer other benefits like security, borderlessness and transparency that don’t exist in the traditional finance industry.
Important to note is also that we are currently in uncertain times, and many firms and institutions are looking for an alternative store of value to protect their cash and company assets against inflation. This need has increased even more in this COVID-19 pandemic which turned almost all global economies and businesses upside down, and resulted in governments printing more and more money and releasing stimulus checks as a solution, pushing the development of an inflation even further.
Bitcoin and other scarce digital assets can provide a hedge against inflation because there can only ever be a limited amount of them (e.g. 21 million BTC).
Microstrategy, the largest institutional investor that owns over 71,000 bitcoins, is a good example for this: Their CEO Michael Saylor, who is a known bitcoin enthusiast, stated that the protection of company assets against inflation was one of the main reasons why he decided to invest in such a large amount of bitcoins in 2020.
By the way, a recent press release by MicroStrategy revealed that certain revenue sectors have jumped by over 50% in Q1 2021 compared to Q1 2020.
CEO Michael Saylor added:”MicroStrategy’s first quarter results were a clear example that our two-pronged corporate strategy to grow our enterprise analytics software business and acquire and hold bitcoin is generating substantial shareholder value. We will continue to acquire and hold additional bitcoin as we seek to create additional value for shareholders”.
So now that we have explored the reasons why digital assets have become more attractive for institutional investors, what is barriers still need to be overcome in order to reach institutional crypto adoption?
Institutional investors can’t simply sign up on an exchange platform and busy some cryptocurrencies there, as retail investors do.
The considerable spreads between ask and bid prices, market prices that differ between exchanges, and KYC procedures that might be difficult to achieve for corporations are all reasons that complicate the process.
Also, institutional investors often have much higher order volumes, which requires an order-routing system so that the prices are not affected by low liquidity. These systems are widely known in traditional capital markets: they connect to multiple exchange platforms and combine order book and trade execution in a single API.
Blocksize Capital and its institutional-grade trading terminal provide solutions for asset managers to ease their entry into the crypto space and overcome these barriers.
The smart order routing feature allows investors to acquire assets with a high investment volume at prices that are not artificially inflated through their own demand, due to routing orders to multiple exchanges.
Other tools for competitive advantage that Blocksize Capital’s software-as-a-service provides include:
- Portfolio construction with holistic position overview to improve projections
- Saving money through the embedded best execution strategy
- Flexible & dynamic order management with complete coverage of all order types and execution calculation (VWAP)
- Holistic reporting on all executed orders
- Setting trading limits dynamically following personalized multi-account user logics
- High resolution real-time and historical data from over 30 exchanges
- Unified API to connect to legacy infrastructure
- Managing all wallets and exchange accounts in one holistic application
- The ability to connect unlimited wallets and accounts and integrate them into one financial suite
Blocksize Capital’s trading terminal makes it easy and efficient for institutional investors and asset managers to benefit from the diversification and profits that digital assets bring, while offering trading tools like smart order routing, wallet management, and real-time data from over 30 exchanges.
To learn more about how to get started with Blocksize Capital’s institutional-grade trading solution, get in touch with us via https://blocksize-capital.com.
We are seeing more managed money and institutional money entering the crypto space. Anecdotally speaking, I know of many people who are working at hedge funds or other investment managers who are trading cryptocurrency personally, the question is, when do people start doing it with their firms and funds?
– Olaf Carlson-Wee, Coinbase
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