Late on crypto? Institutions still at early stage of Bitcoin adoption

Institutional investors are said to be switching en masse to bitcoin (BTC), and more and more companies are seeing bitcoin as a way to hold their reserves. Marathon Patent Group, a Nevada-based bitcoin mining company, recently bought bitcoin as a backup asset for $150 million, a move similar to its purchase of MicroStrategy for $425 million in September 2020. This purchase made Marathon Patent Group the third largest owner of BTC among publicly traded companies.

In addition to Marathon, BlackRock, the world’s largest asset manager by assets under management, said in new filings with the U.S. Securities and Exchange Commission that bitcoin derivatives can now be part of the investment plans of two of its affiliated funds, BlackRock Global Allocation Fund Inc. and BlackRock Funds. This will certainly set a precedent for other large asset managers like Vanguard, UBS Group, State Street Advisors, etc. to enter the cryptocurrency investment space.

According to a study by technology researcher Kevin Rooke, publicly traded companies currently own more than $3.6 billion in bitcoins, up 400% in the past 12 months. These companies had just 20,000 BTC in their portfolios in 2019, and that number has now grown to 105,837 BTC, with MicroStrategy, Galaxy Digital and Marathon Patent Group as the biggest holders. Institutions are now getting involved in the bitcoin market, as some expect bitcoin to become a digital alternative to gold.

BTC runaway in 2020 leads to FOMO for institutional investors

The price of bitcoin jumped from about $7,250 in early 2020 to its all-time high of $41,940 on the 9th. January of this year. This jump allowed investors to earn a 303% return on their bitcoin investments by 2020. These returns were much higher than market indicators such as the S&P 500, the Nasdaq Composite Index and gold.

These unusually high returns on bitcoin have institutional investors worried that they won’t benefit, especially since several large traditional financial firms have warned that bitcoin could reach $100,000 later this year. Scott Freeman, co-founder and partner of JST Capital – a firm specialising in digital assets for institutional investors – told Cointelegraph that BTC is being recognised more as an asset in its own right: Funds that missed out on the 2020 growth are being pressured by their investors to access these assets.

In addition to the high returns that bitcoin and other cryptocurrencies have offered in 2020 and 2021, institutional investors want to use bitcoin to hedge the risk of other assets in their portfolios that have a low correlation to cryptocurrency markets.

Sergei Zhdanov, director of operations and finance at EXMO, a UK-based cryptocurrency exchange, told Montelegraf that cryptocurrencies have a higher value than gold in practice. This confirms the fact that cryptocurrencies have the ability to develop their application properties (means of payment and circulation) and not just their investment properties.

An example of institutions using bitcoin as a hedge for their portfolios is Ruffer Investment Company’s announcement to its investors that it currently holds 2.5% of its portfolio in BTC, arguing that we consider it a small but powerful insurance policy against the ongoing devaluation of the world’s major currencies.

Any early birds or latecomers?

With more institutions buying bitcoin and other crypto-currencies, it could be argued that these investors are a little late to the party and are buying assets at a higher price than if they had just stepped into the crypto space a year ago. However, Simon Peters, a market analyst at eToro – a social trading and multi-asset brokerage company – told Cointelegraph:

Institutions that are now buying bitcoin and holding it as a backup strategy can still be considered early adopters in entrepreneurialism. In the coming months and years, investors will see 2021 as an opportune time to get into cryptocurrencies. Early adopters open the playing field for others.

Buying and holding Bitcoin as a reserve currency for their portfolios alongside traditional assets is just the first step towards widespread risk. As these institutions become more familiar with digital assets, they will consider other uses, such as payments, money transfers and settlements, Peters said: It’s even possible that central banks will start holding bitcoin, as it expands its status as the world’s digital reserve currency.

Earlier this month, eToro released its Institutional Crypto Asset Trading Report, which shows that one of the main barriers to institutional crypto adoption is the lack of market capitalization. With the market capitalization having crossed the $1 trillion mark, traditional players entering the market are expected to reach the $2 trillion mark in the near future. Peters went on to say that the new US administration’s response to cryptocurrencies will be crucial:

In the world of regulation, a new US administration – including the arrival of a new Treasury Secretary, the head of the OCC, the chairman of the SEC, and the chairman of the CFTC – can dramatically affect the evolution of the cryptocurrency market and its relationship with traditional markets.

Is the market responding to institutional purchases?

The market is now forcing institutional investors to enter the market, as they are being pushed by their clients who want access to this growing asset class. But these investors who buy bitcoins have no real impact on the market price action in the current scenario, as they are supposed to act as a kind of lagging indicator for these markets. It is therefore doubtful whether these investments are really driving the market.

However, Zhdanov believes these investments will drive the market in the long run, as large investors tend to hold on to their positions. Moreover, the number of new BTC addresses created daily has still not reached 2017 levels, suggesting that the current growth is organic. Freeman added that the entry of these players could fuel volatility in these assets: These investors typically have longer investment horizons and will tend to compensate for short-term volatility that may be caused by retail investors investing for the short term.

It is important to remember that the BTC market is still speculative and does not follow the rules of traditional trading based on fundamentals and technical analysis. The most recent example is Elon Musk, who added #Bitcoin to his bio with a corresponding sentence on Twitter: In retrospect, it was inevitable.

Looks like it: Institutional demand for cryptocurrencies is not falling, but the impact will be gradual.

The price of bitcoin responded with a strong surge, later called Elon Candle, rising 13.9% in the next 30 minutes. This alone shows how speculative the market is right now. Regardless of these short-term price fluctuations, however, it is expected that more institutional investors will flock to cryptocurrency markets for profitable returns, hedging opportunities and exposure to diversified portfolios, although more slowly than many would like to believe.

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