As institutional investment pours into the crypto space, there are questions about how this will affect the space. Insiders look at the opportunities to push for mainstream adoption while also weighing up overall influence.
The crypto space exploded over the last year. From bitcoin reaching its all-time high, the NFT boom, and new DeFi innovations, the industry has never been more energized. In the midst of all this activity, new investors flooded the market.
In fact, most statistics say crypto and blockchain investments nearly doubled from 2020. More recently, the inflow into the markets and exchanges is at the hands of individual investors. August’s resurgence of digital currencies such as bitcoin, ether, and dogecoin largely comes from individual retail investors.
However, this year also saw record numbers of institutional investments pour into the crypto space. According to a Fidelity Digital Assets survey, 71% of institutional investors have plans for digital asset investments in the future. In addition, both big investment firms and entire countries prepare for a market with more institutional investment.
This year financial services giant Visa made a grand entrance into the crypto space. While Visa already began its crypto ventures earlier, 2021 saw the company’s involvement via major investments.
PayPal also made waves with its various crypto-related announcements. Most recently, the payments giant opened cryptocurrency trading for its customers in the United Kingdom. It, along with Visa, also invested in Blockchain Capital’s $300 million fund in June.
However, there are concerns about what other implications come along with this increased interest.
Making crypto easier
The biggest takeaway from institutional investment is the accessibility it brings to the wider public.
For example, Grayscale’s Bitcoin Trust allows individual investors to speculate on bitcoin without buying it directly. When people are still hesitant about crypto, this makes entrance into the market even easier. In other words, they are “gateway drugs” into the crypto space.
Barney Mannerings, the CEO of Vega Protocol, a decentralized derivatives trading and settlement network, explains how this growth provides protection.
“I welcome money and interest from institutions like PayPal that are outside of the crypto-native community. The more crypto and decentralized finance (DeFi) are integrated into the ‘real world,’ the better. It makes it more challenging to stifle the growth and success of the technology or to regulate it into oblivion.”
“PayPal bringing crypto to its users in the UK will make this asset class more accessible and can serve as a gateway to experimentation. Once everyday users become more comfortable holding cryptocurrencies, they’ll explore ways in which they can put them to work and generate value through more sophisticated DeFi products which to date, no traditional financial institutions or consumer finance applications are really offering,” he says.
These additional financial products and offerings are a departure from institutions simply holding large amounts of bitcoin.
“The difference now is that, where previously institutions were interested in holding crypto like BTC directly, now they are more interested in offering products to differentiate themselves with customers. Institutions as diverse as hundred-year-old global investment banks to brand new mobile app startups are reaching out to ask how they can source DeFi yields for customers,” says Sidney Powell, CEO, and Co-Founder of Maple Finance.
This time it’s different
There is no denying the fundamental shifts that have happened in 2020 and 2021. Kevin Tai, CEO and Co-Founder of Linear Finance explains how this development is different from previous piqued interest from the traditional finance sector.
“I believe that this time it’s different than before because there has been a sweeping change in the global perception of cryptocurrencies in many countries at a time of economic uncertainty. The explosive growth in bitcoin and ethereum has led to a strong adoption from retail customers, and big corporations are now seeing this as a way to maintain their competitive advantage.”
In addition, Gunnar Jaerv, COO of First Digital Trust, says that these big players no longer stand by on the sidelines in the space. They now have active interests aside from stagnant holdings.
“They’re not just sitting on the sidelines anymore, but they do want to take part in this new asset class.” Though Jaerv raises some concerns about big player investment, “however there may be some challenges in doing so – regulations, lack of infrastructure and education.”
The issue of unintended consequences
These positive outcomes do hold the lion’s share of attention and importance when considering these big investor moves. However, there are concerns about unintended consequences.
Matt Luongo, the co-founder of Thesis, appreciates the impact that institutional interest has had on the price and the crypto community.
“Everyone thought we were crazy for years, and we all want validation,” he says. “But institutional interest is a poison apple. The more tightly institutions embrace crypto, the more likely they are to over-regulate, build moats, and attempt to co-opt what we’re doing.”
This kind of hype and downfall was seen this year through Elon Musk and Tesla. Musk’s rapid rise and fall in interest had consequences for cryptocurrencies, at least on the surface.
In addition to concerns about co-opting, Mannerings sees how institutional involvement could undermine the fundamental structural changes crypto is trying to make.
“I am wary that as we see more institutions entering the space, resources will be funneled towards incorporating tame versions of crypto assets/DeFi protocols into current centralized systems that will perpetuate many of the same problems and structural issues that we have now.”
However, he also sees even more opportunities for growth.
“I’m much more interested in institutions backing technologies that build fair, secure, decentralized systems that are a real alternative to the centralized systems we see today, which is the ultimate promise of the technology.”
A balancing act
Institutional buy-in is necessary to continue moving cryptocurrencies and blockchain technology into the mainstream.
However, it is likely to be a balancing act. As adoption and interest expand, how to best to incorporate various interests and motivations will have to be addressed.