[TL;DR]

• Institutional investment in crypto took off in mid-2021 when MicroStrategy scooped up bitcoin in large quantities. It has continued to gain momentum in many directions since then.

• Some ways institutions invest in crypto include holding bitcoin on their balance sheets, accepting payment in cryptos, building mining rigs, etc.

• The increase in institutional investment in crypto will increase general confidence in the nascent asset class.

• On the flip side, It could also lead to intense instability, and potential crashes if not correctly managed.

INTRODUCTION; Institutional Investors are Broadening their Participation in the Market

The rate of crypto’s adoption continues to jump at an ever-increasing speed, a gratifying state of things for early adopters. But for a long time, the bulk of investment in this sector remained in the control of retail traders. However, this state of affairs took a new turn starting in mid-2020 when institutional investors began to test the waters.

The journey began in earnest with adventurous institutions adding the flagship crypto, bitcoin, to their balance sheets. Notably, radical bitcoin advocate Michael Saylor spearheaded this enterprising group. In fact, his company MicroStrategy still owns the most institutional investment in bitcoin to date, close to 130,000 BTC. As the largest crypto by market cap and the longest-standing, the king coin has gained a level of trust among this risk-averse set of investors.

Additionally, as adoption increases and more utilities emerge for the nascent asset class, institutional investors are broadening their participation. As a matter of fact, by June this year, almost 7% of the total bitcoin supply was held by institutional investors. According to Bloomberg, about $17 billion of institutional capital has been pumped into the crypto sector this year alone.

Source: Moralis Academy

Are institutional Investors The Same Thing As Whale Investors?

“Institutional investors” simply describe the involvement of institutions in crypto projects. Institutions typically invest more than individuals who only engage in retail investing. However, not all whales are institutional investors, and some whales are, in fact, individuals. The official definition of a whale is any wallet that carries up to 1000 BTC (or its equivalent in altcoins. While institutional investors could fall into this category due to their larger capacity, that is not always the case. This is because they are not always as keen to pour funds into crypto because of its intense* volatility. Hence, in the strictest sense of the word, not all institutional investors in crypto are whales, but most are.

How Institutional Investors Are Participating In Crypto With Notable Examples

Since institutional involvement in crypto took off, it has spread over various organization types. From Movie theaters to fashion brands and governments, everyone suddenly seems to want a slice of the crypto cake. Below are some notable examples across the board:

Source: Finoa

By Holding Crypto in Their Balance Sheets

• (MicroStrategy): This cloud software company led the way for institutional investment in crypto. It first purchased bitcoin worth nearly $250 million between August and September 2020. Since then, MicroStrategy, led by its bitcoin-loving CEO, Michael Saylor, has not looked back. According to Buybitcoinworldwide, by September 2022, the company owned 130,000 BTC purchased at approximately $4 billion.

• (Block, Inc.): Formerly known as Square, this payments company’s journey into crypto began in October 2020 when it splurged $50 million. By the end of the year, that amount had increased to over $200 million. Furthermore, Block expressed interest in going into Crypto techs, such as building hardware wallets and bitcoin mining rigs.

By Accepting Payment In Crypto

• (AMC Theaters): The biggest movie theater chain in the US embraces crypto by incorporating it as a payment method. From November 2021, users can buy tickets using bitcoin (BTC), bitcoin Cash (BCH), Ether (ETH), and Litecoin. Subsequently, when that proved successful, the theater chain included Dogecoin, Shiba Inu, etc., in their list by popular demand. By April 2022, AMC was reaping its rewards as crypto payments constituted 14% of online transactions, according to CEO Aron.

• (Tesla): Another significant institutional investment that cannot be side-lined is the electrical vehicle producer Tesla. According to an SEC filing, the company invested approximately $2 billion in bitcoin by December 2020. However, Tesla sold 10% of its holdings in Q1 2021, a move CEO Elon Musk described as testing bitcoin’s liquidity. Additionally, By March of the same year, Tesla began to accept payments for its products and services in bitcoin. Unfortunately, that didn’t last because of bitcoin’s heavy consumption of fossil fuel which is harmful to the environment. Tesla opted instead to diversify into other less energy-consuming cryptos like DOGE, a meme coin.

• (Gucci): In May 2022, Gucci became the first prominent brand to accept crypto payments. The fashion giant accepts a dozen cryptos, including Apecoin, the token of popular NFT (BAYC) Bored Ape Yacht Club’s ecosystem. 70% of the Italian fashion brand’s directly operated stores accept cryptos like bitcoin, Ether, Litecoin, Dogecoin, and even stablecoins.

Through Involvement in NFTs and Metaverse

Institutional participation in the metaverse and NFTs investments is limitless, with new patterns cropping up daily. To name just a few:

• Nike acquired an NFT collectible and fashion firm that produces virtual sneakers, RTFKT

• Arizona Iced Tea joined the BAYC train by purchasing an NFT and putting it on its can.

• Barbados acquired a spot for an Embassy on Decentraland virtual real estate late last year. And the list goes on.

Through Launching Crypto Startups:

Coinbase: Crypto companies like Coinbase, a popular cryptocurrency exchange, are not left out. This flagship crypto platform was even directly listed on Nasdaq in April 2021. As of July this year, it holds 2,500 BTC in its portfolio despite some downtimes.

By Joining Decentralized Finance (De-fi)

(Aave Pro): Aave is one of the most popular defi solution providers for retail investors. It is a non-custodial P2P lending platform that authorizes users to lend and borrow digital assets at competitive rates. However, the decentralized nature of this project raised some regulatory issues that made institutional investors unable to participate. This is where Aave Pro came in with its KYC’d pools that allowed organizations to lend and borrow in the decentralized lending market. Compliance with regulatory requirements. The project, launched in July 2021, enabled institutions to enjoy decentralized lending that complied with regulatory demands.

By Running Mining Operations

• (Marathon Digital Holdings): This company’s goal is to run the most extensive bitcoin mining operations at the lowest electricity cost in North America. It holds more than 10,000 BTC in its coffers. Consequently, it plans to employ 200,000 miners and has already placed an order for a significant number of mining machines.
  
  

• (HUT 8 Mining Corp): A Canada-based crypto mining firm, Hut 8, holds bitcoin worth about $160 million. Mid-last year, Hut 8 got listed on Nasdaq as HUT and continues to aim towards growing its value by increasing its bitcoin holdings.

As Legal Tender (El Salvador)

Mid 2021, the republic of El Salvador shocked the world by passing a law adopting bitcoin as a legal tender. Nayib Bukele, president of the central American democracy, is a strong advocate of the nascent asset class. He believes it will help salvage their economy from the cost of remittances, which account for 24% of its GDP. Additionally, Bukele hoped to lure investors to his country through his bold move.

Investing in Equity Type Investments (GrayScale bitcoin Trust)

Some institutions invest in crypto through indirect channels like the GrayScale bitcoin trust, which tracks bitcoin’s value. Also, in other countries apart from the US, the most popular way for institutions to do this is via Exchange-Traded Funds or ETFs. Others invest in hedge funds and derivatives exchanges.

Source: grayscale investor study

Factors Hindering Institutional Investment in Crypto

Market Volatility: Tradfi still considers crypto a risky asset; hence institutions try to mitigate it by investing through hedge funds. This means of trading involves co-partners pooling together funds and utilizing multiple strategies to earn returns for investors actively. Furthermore, Hedge funds employ market neutral, volatility arbitrage, merger arbitrage, and long and short equity to mitigate risks. They are also only available to investors who are accredited, so they are a perfect fit for institutional investors.

Market Size (capitalization): Institutions require enough liquidity to execute short trades. Although Crypto’s market cap continues to increase in spite of the recent bearish pangs it is experiencing, it cannot compare with traditional finance. In 2021, the global crypto market hit an all-time high of $1 trillion. However, it dropped beneath that amount this year due to this year’s upheavals, according to CoinMarketCap data. But even at its highest, the crypto market size could not compete with the equities market, which rests at 125 trillion. As it stands, the relationship between the crypto industry and institutional investors has to be quid pro quo. Institutional investment increases crypto’s market cap, and as the capitalization rises, institutions have more liquidity.

Regulation lapses: Crypto’s previous lack of regulation posed a problem to organizations as they are mostly bound to comply with specific requirements. But regulators are catching up, and companies like Aave above are incorporating regulatory-compliant operations. This is gradually increasing the trust level of institutions for crypto.

What are the effects of Institutional Investors Participating in Crypto?

As you will see below, institutional involvement in crypto is a two-edged sword.

On the one hand, the widespread involvement of organizations in crypto would signal and inspire massive adoption of the digital asset class. Such involvement automatically breeds trust among individuals and corporate bodies. This would, in turn, ease the adoption of crypto by making it possible for companies to seamlessly implement multiple utilities.

Furthermore, when institutions take large and long positions in a crypto ecosystem, they stabilize it as whale movements tend to upset the market otherwise. In such cases, they might not influence a massive buy scenario, but they are not instigating a panic sell-off either. It is also common knowledge that institutions typically invest more than the average retail investor. Hence, when organizations show interest in the crypto market, it excites the presently involved parties.

On the Flipside, the same whales that can settle markets can also manipulate them, causing intense volatility. In extreme cases, they can cause an entire ecosystem to crash, as in the case of the infamous stablecoin Terra’s UST.

In Conclusion

Institutional investment in the crypto industry is on the increase, to the delight of its advocates and current investors. However, for this development to be considered good, all parties have to tread carefully. This is to avoid falling back into the very thing the digital asset arrived to circumvent, centralization and its rigidity.

Author: M. Olatunji, Gate.io Researcher

Disclaimer:

* This article represents only the views of the observers and does not constitute any investment suggestions.

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