Petr Kozyakov, a co-founder and CBDO of the international cryptocurrency payment solution Mercuryo.io, shares his thoughts on the recent surge in institutional interest in bitcoin and its possible impacts on the digital asset market.
It’s official: 2020 is the year of institutional investments in crypto. And for a valid reason.
Digital asset funds have seen record inflows into their products, while large corporate players hold a significant share of the circulating bitcoin (BTC) supply.
But what is behind this phenomenon, and how will it impact the maturing crypto market?
Safe assets fail to meet investor expectations
Even during pre-pandemic times, the general market’s low-risk instruments generated disappointing returns for investors.
Examples of such include savings accounts and high-quality government bonds, with the latter currently yielding modest 0.86 per cent for 10-year US Treasuries and 0.32 per cent for 10-year UK Gilts.
In a worst-case scenario, high-quality bonds like German Bunds provide negative yields to investors even with 10-year or 20-year maturities.
Even if a safe investment provides some returns to investors, the gains are so small that they will be eaten away by inflation.
Institutional investors to replace gold with bitcoin
While individuals can “afford the luxury” of generating very small or negative returns, institutional investors have to meet their stakeholders’ ROI expectations.
For that reason, when there’s turmoil on the general market and safe assets are underperforming, institutional investors have to look for alternative investments to boost their returns.
Gold, a safe-haven asset widely believed to perform well during uncertain times, has been one of these instruments institutional investors turned to since March. However, gold’s bull run ended in August, and the asset has been declining since.
On the other hand, bitcoin has been continuously rising since March’s market crash. Currently trading above the $19,500 level, the digital asset is very close to its $20,000 all-time high, which it only briefly touched before 2018’s devastating crypto winter.
On top of that, the cryptocurrency’s total supply is capped at 21 million BTC, while featuring a built-in mechanism called “halvening,” which reduces the number of coins entering into circulation to half in every four years. This is to combat inflation and ensure a long-term value increase for the digital asset.
As a result, with a year-to-date growth of over 160 per cent and a near-all-time low volatility level, bitcoin has become an attractive safe haven asset for institutional investors.
At the same time, recent reports of prominent investment banks, such as Deutsche Bank and JPMorgan, confirm the same phenomenon, indicating a move from gold to bitcoin among institutional investors.
Why this bitcoin bull run is different
People often fear that this year’s bitcoin bull run will end with the same dire consequences as the previous crypto surge back in 2017.
In 2017, FOMO, hype, and speculation were the fundamental driving forces behind the cryptocurrency market’s bullish trends.
At the time, the industry was somewhat unregulated, and it was enough for digital asset projects to raise a record amount of funds with only a concept or a semi-finished product.
Also, the market was mostly driven by retail investors with various levels of experience and knowledge about cryptocurrencies (and money markets), who were ready to pump cash into one of the trending ICOs.
However, things are very different, this time.
2018’s bear market disrupted the market, forcing many projects to leave the industry. On the other hand, those who survived the crypto winter have added tremendous value to the space and built out a working infrastructure around digital assets.
Regulation has also taken place, and cryptocurrencies have been expanded with more use cases. Apart from bitcoin’s safe-haven features, ether has become a leader of the DeFi boom, creating such heavy activity on its blockchain that it has since congested the cryptocurrency’s network.
The above is a signal of a maturing cryptocurrency market.
But we now have an even better indicator in the form of institutional investors who have finally arrived in the industry, a phenomenon we were missing during the 2017 ICO boom.
And bitcoin has seen a massive inflow of institutional investments lately.
While corporates such as MicroStrategy, Square, and Galaxy Digital are holding nearly 850,000 BTC (the equivalent of over $16.6 billion and around 4 per cent of the circulating bitcoin supply, at press time), digital asset manager firm Grayscale Investments raised over $1 billion in Q3 2020 during its third consecutive record-breaking quarter.
Institutional investors lead the way to mass adoption, not new bitcoin highs
Contrary to what people generally believe, institutional investors are not the key to reaching new bitcoin highs.
Instead, they leverage their extensive experience to take advantage of the crypto market’s inefficiency (e.g. when a digital asset is overpriced or underpriced) and make a profit from them.
As a result, they increase the crypto market’s liquidity while reducing digital assets’ volatility, ultimately leading to a more efficient and mature industry.
And it’s a natural development that benefits bitcoin in the long run as a more stable, mature, and less risky market facilitates mass adoption of cryptocurrencies.
Interestingly, the rising institutional activity in crypto doesn’t exclusively come with alternative investments.
As digital assets also function as payment systems, the more corporates are involved in the space, the larger demand for cryptocurrency products and services – such as payment gateways, custody, liquidity, and enterprise lending solutions – will experience from the B2B side.
And when more corporates follow the footsteps of major players such as PayPal to introduce their digital asset solutions targeting the general public, cryptocurrencies will finally enter the mass adoption phase.
NOTE: The views expressed here are those of the author’s and do not necessarily represent or reflect the views of BeInCrypto.
Written by Petr Kozyakov, a co-founder and CBDO at Mercuryo.io. Petr is responsible for the interaction with payment partners and banks, launching new products, obtaining licenses, and strategic development of the company. Also, Petr has extensive experience in working with European markets, and a strong background in the payments industry.