The landscape of institutional adoption of cryptocurrency

Mateusz Raczyński
02 June 2021 · 11 min read

There was a time when traditional institutions remained utterly disdainful of bitcoin and other cryptos; it wasn’t long ago. Apart from geeks and early adopters, most people hadn’t even heard of bitcoin, while for others, perceptions originated mainly in rumors. Even today, there’s a substantial population of people who are skeptical of crypto, deeming it as a currency for criminals. And if the truth is told, most people still don't understand zilch about bitcoin, or for that matter, cryptocurrencies.

The times, however, are changing, and too, quite rapidly. Not only are more and more people learning about crypto, but there’s also been promising institutional adoption as well. In courtesy of its record-breaking prices, Bitcoin has been a significant driver of this change, but altcoins such as ETH are also playing their role. From financial strategists to international merchants, crypto is steadily pervading into wide-ranging business domains.

In our journey towards the financial future, legacy institutions adopting crypto are a significant development. That such adoptions are happening across geographical boundaries—from the Americas to Europe to Asia—further strengthens the futuristic financial narrative. Against this backdrop, this article charts out the landscape of cryptocurrency’s institutional adoption.

Realizing its pivotal role in this regard, we shall begin with Bitcoin’s success story concerning adoption by institutional clients. After that, we will look at the remarkable growth of some crypto-based platforms and exchange-traded funds. Throughout this journey, brace yourself to witness giants that have, and still are, transforming their fields of business.

Twenty-Twenty-One: The Wave of Bitcoin’s Institutional Adoption

In 2021, the institutional adoption drive for bitcoin has been highly promising, with several fintech giants coming onboard. Institutional investors’ confidence in digital gold has soared alongside its price, sparking off a series of developments in the sector. This is also the year when bitcoin joined the ranks of the primary, tier-1 capital reserve for global enterprises.

Elon Musk has always been immensely enthusiastic and supportive of the crypto movement, actively promoting bitcoin on Twitter. As a token of commitment to the crypto domain and ensuring its sustenance, Tesla bought $1.5 billion worth of bitcoin. Musk hopes that this purchase will diversify and maximize his company’s ROI. Not only that, he announced that you’ll be able to buy Tesla cars using bitcoin but backed off later on as the energy consumption of Bitcoin didn’t fit well the company’s mission–even though they had never sold their Bitcoins.

One of the most significant bitcoin funds, Grayscale Bitcoin Trust, became an SEC Reporting Company in 2020. GBTC shares offer a great window to clients who wish to invest in bitcoin without the hassle of actually holding cryptos. Accredited investors can buy shares at net value and sell them at a premium to retail investors in secondary markets. This has helped them acquire around $5.7 billion from new clients, with its asset holding surpassing $38 billion in February 2021.

MicroStrategy, a company that develops business intelligence software, has adopted buying as many bitcoins as possible. It completed a $1.05 billion debt offering that will allow them to buy $1 billion in bitcoin. Having adopted bitcoin as its primary treasury reserve asset in 2020, the company had 71,039 bitcoins by February 2021.

JP Morgan has also expressed a bullish stance, hoping for long-term confidence and institutional interest in bitcoin. The financial giant revised its bitcoin price target to $130,000 to align it with the private sector’s total investment in gold.

Furthermore, BlackRock, arguably the world’s largest asset manager, with $8.68 trillion AUM, has also started dealing in cryptos. In January 2021, it added bitcoin futures as an investment vehicle for its Strategic Income Opportunities and Global Allocation Fund. Rick Rieder, chief investment officer at BlackRock, said that bitcoin could become a storehouse of value and take over the position of gold.

In terms of crypto adoption, Europeans aren’t lagging behind either. Ruffer Investment Management, a fund manager based in Britain, made a $745 million bet on bitcoin in December 2020. Ruffer’s allocation fetched $27.3 billion in assets, which they claimed would work as a hedge. It effectively secured 6,500 clients against the risks involved in a fragile digital economy.

Reaching New Heights

Surfing the wave of adoptions, bitcoin has reached a new milestone, with its total market value crossing $1 trillion. The digital gold was trading at $54K-$55K when it achieved this phenomenal feat. Not just that, but bitcoin has become the fastest asset to reach a $1 trillion market cap, surpassing Microsoft, Google, Amazon, and Apple.

The whole gamut of activity around bitcoin shows that crypto, in general, has indeed come a long, long way. As the Winklevoss twins tweeted, bitcoin’s journey is phenomenal. From being a white paper by an anonymous person, crypto industry leaders are now speculating when bitcoin will replace the gold standard.

Crypto-Based Platforms Driving Growth

Bitcoin may be the star kid in town, but there’s much more to the blockchain-cryptocurrency space. There are wide-ranging digital currencies supported by cryptocurrency exchange platforms, lending services, and asset management platforms. We’ll now turn our attention to these services.

Genesis, one of the largest digital asset lenders in the crypto markets, has scaled new heights last year. Players from the world of institutional finance, including banks, private equity firms, and mainstream investors, have driven its growth story. By Q4, 2020, Genesis had $19 billion in cumulative loan originations and had traded $8.1 billion in spot crypto. In Q1, 2021, as well, there’s been $20 billion in loan origination and a staggering $31.5 billion in spot trading.

Diginex is a digital assets management company listed on NASDAQ, innovating blockchain-powered SaaS offerings alongside owning the cryptocurrency exchange, EQUOS. This exchange set a record in May 2021, as its 24-hour spot and derivatives volume exceeded $200 million. Over the month, the trading volume has risen by 40%, reaching $2.9 billion.

Galaxy Digital is a financial service and investment management platform for digital assets. It has performed brilliantly in the first quarter of 2021, with its net comprehensive income growing to $860 million from $336 million in the previous quarter. Additionally, its AUM increased by 58%, alongside a 510% rise in counterparty loan origination. Furthermore, as a forward step in its institutional adoption strategy, the company has plans to acquire BitGo.

Chicago Mercantile Exchange (CME) is the world’s largest financial derivatives marketplace that trades in multiple asset classes. CME ranks second on the list of Bitcoin Futures Exchanges, accounting for $1.92 billion of the total open interest of $12.38 billion. Binance tops this list, with an open interest of $2.17 billion.

Bakkt, a digital assets management platform, helps generate liquidity for digital assets and empowers users to diversify their payment options. Unlocking the potential of cryptocurrencies ensures a lower cost of payment acceptance. Bakkt has partnered with the digital payments company, Cantaloupe to allow customers to pay with cryptos at vending machines, self-checkout markets, and arcade games. This option will be available in over a million unattended retail devices across the company’s nationwide network.

A Note on Exchange-Traded Funds (ETFs)

Despite promising cryptocurrency investments and adoption, volatility remains a persistent problem for the global crypto community, not sparing investors as well. As a result, much uncertainty prevails in the domain, especially among high-value investors. In turn, this dampens the possibility of even better growth. To this end, though, Exchange-Traded Funds (ETFs) are a good way around, serving as a risk buffer while ensuring crypto-driven benefits.

The primary upside of ETFs is that they relieve investors of the security and management risks that accompany ordinary crypto-trading. By relegating money to the custodian bank associated with a given ETF, investors forego the stress of losing money to scams. ETFs also provide the opportunity to hold multiple tokens at once in a single crypto basket. Instead of having separate wallets for different tokens, investors can trade in ETFs, thereby diversifying their portfolios with ease.

The Amplify Transformational Data Sharing ETF (BLOK) is the leading blockchain ETF for Q3 2021. The funds operate in software and financial services, with $1.3 billion AUM. The Siren Nasdaq NexGen Economy ETF (BLCN) ranks second in this regard, with $319.9 million AUM in blockchain technology. Third comes the First Trust Indxx Innovative Transaction & Process ETF (LEGR), with its AUM in the finance and IT sectors amounting to $92.8 million.

Some Other Big Names

Since December 2020, there’s been a 7.2% growth in the number of wallets holding at least 1000 bitcoins. Parallelly, the AUM of all regulated cryptocurrency products has grown by 95%, which amounts to a phenomenal $35.9 billion. The involvement of internationally renowned enterprises and institutions has been a significant driver for this growth, as highlighted in the previous sections. Apart from the ones mentioned above, there are some other names that we must mention before concluding this discussion.

Goldman Sachs, for instance, has revealed its intention of offering investment vehicles for bitcoin soon, enabling private wealth managers to hedge against inflation. Morgan Stanley, on the other hand, is already offering funds that facilitate bitcoin ownership. The option, however, is available only to clients having a minimum bank balance of $2 million.

The Bank of New York Mellon, America’s oldest bank, will also offer integrated services for financing bitcoin and other digital assets. In doing so, the institution will leverage the existing financial network employed for handling traditional holdings. This is a giant leap for custodian banks concerning the pushing through of cryptos as mainstream financial assets.

Furthermore, riding on the shoulders of VISA, PayPal, and Mastercard, cryptocurrencies have also entered the domain of conventional digital payments. VISA is processing crypto-based payments without requiring users to convert from cryptocurrency to fiat. PayPal enables individuals to use their Debit/Credit card, paying over 29 million merchants in BTC, ETH, LTC, and BCH. Mastercard has also opened up its network to crypto, fostering new avenues for buyers and sellers alike.

Not only institutional clients are interested in crypto. In the public sector, as well, there’s increasing enthusiasm around cryptos. New Zealand’s national retirement saving scheme, the KiwiSaver Growth Strategy Fund, has invested 5% in bitcoin out of its total holding of $244 million in New Zealand’s national retirement saving scheme. The New Zealand Funds Management Ltd. hopes to encourage further governmental cryptocurrency adoption through this drive.

Parting Words

Despite all the encouraging news and growth stories, everything is not hunky-dory. It is a fact that the bitcoin market scenario and the overall cryptocurrency domain always remain in a state of flux. The conditions are indeed volatile, and there is enough evidence to show much uncertainty in cryptocurrency prices.

In March 2020, bitcoin dropped below $5K due to a sudden liquidation of futures. Although the recovery was staggering, almost touching the $65K mark, the asset has again corrected to $30K-$35K. China’s warning to restrict crypto mining, Tesla’s abrupt decision to stop accepting BTC have contributed to these bearish trends. But one must remember that cryptos, especially bitcoin, are in for the long haul.

Whereas almost every traditional currency in the world has depreciated over time, cryptocurrencies have gained in value. Tesla may have flipped on its promise, for now at least, but other enterprises and institutions are going strong. So much so that analysts and investors who were earlier skeptical of this new-age currency are now increasingly partaking in crypto-based assets. Digital asset companies try to gain investor interest through better infrastructure like more effective risk monitoring and compliance. Latest news are stating that institutional capital is contributing substantially to the global expansion of the cryptocurrency community.

There may be further market corrections in the near future, although the progress gained over the years is mostly permanent. The apparent volatility, as well, is predominantly immediate and an outcome of the domain’s nascent state. Considering the present rate of adoption, it’s not long before we have a stable and sustained market for cryptocurrencies. Our trajectory is most definitely towards a new financial paradigm, leveraging promising innovations.

At Ulam Labs we are empowering blockchain businesses with crypto exchanges, lending platforms, NFTs, and Algorand development services. Talk to our experts about your idea.

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