The Bitcoin and cryptocurrency’s rally have primarily been driven by retail investors over the last decade, however, this is likely to change in the coming years. On the 7th of September 2021, Bitcoin’s historic adoption as a legal tender in El Salvador became a reality.
The cryptocurrency space has piqued the interest of investors from across the world lately. Whether investors are well-versed and self-educated about the space, seeking advisory services, or simply just FOMOing (fear of missing out) in, there is no denying that this burgeoning ecosystem is seeing immense investment from across all investor categories.
There are two types of investors across investment assets. First, you have the retail investors who are individual customers, with limited personal investment potential. They typically invest a small portion of their earnings from salaries or other sources of income. Then you have institutional investors who could be money managers, pension funds, hedge funds, investment banks, mutual funds, and the like who collectively manage trillions of dollars of investor’s money. Hedge funds alone surpassed $4 trillion in assets in the 1st quarter of 2021. They have huge buying power and have the potential to move the markets.
Fidelity Digital Assets, part of the Fidelity Investments group, one of the world’s largest and diversified financial service provider conducted a survey with 1,100 institutional investors across the globe and found some interesting insights. Seven out of ten institutional investors were expected to buy digital assets in the future, while a whopping 90% of them expected to have crypto allocation in their client’s portfolio within the next 5 years. Lack of dependence on other assets and high potential are the two reasons cited for this change. Fidelity Investments Inc. also purchased a 7.4% stake worth approximately $20 million in Marathon Digital Holdings, one of the largest bitcoin mining operations in North America, across four of its broad index-based funds. Joining Fidelity and Vanguard, BlackRock, the world’s largest asset manager with $9 trillion in assets, also took significant stakes in Marathon Digital Holdings and Riot Blockchain. This exemplifies a growing demand among institutions of gaining exposure in the crypto industry.
The World Economic Forum has identified factors such as central bank policies, hyperinflation, macroeconomic instability, and scaling of stablecoins (digital currency pegged to a fiat currency) which are pushing crypto adoption across the world. JPMorgan has become the primary large US bank to permit all wealth-management clients access to bitcoin and other cryptocurrency funds. Also, investment banking giant Morgan Stanley is now the second-largest shareholder of the Grayscale Bitcoin Trust (GBTC). According to recent SEC filings, Morgan Stanley owns over 6.5 million shares of GBTC worth over $240 million. Apart from J.P Morgan and Morgan Stanley, some of the other major banks that are invested in cryptocurrency directly or indirectly include Standard Chartered Bank, BNY Melon, Citigroup Inc, UBS Group, BNP Paribas.
The term Cryptocurrency isn’t limited to Bitcoin. Crypto projects and start-ups are now adding value to the ecosystem paving the way for an all-new virtual currency world and one such project is DeFi.
In the present world, traditional financial services are entirely centralized (controlled by a single authority or managed in one place) in nature with many risks and challenges such as fraud, mismanagement of funds, theft, restrictions, and limited access to one’s own money. DeFi or Decentralized Finance addresses these challenges by distributing ownership across the network, instead of one controlling center. DeFi as a category of Dapps or decentralized applications are launched on networks such as Ethereum. Essentially, this makes DeFi a financial service with no central authority. It allows people to have complete custody and control of their money while garnering more returns, by eliminating third parties.
Let’s look at this with an example. With a savings account, you get an approximate 0.55% APY (annual percentage yield) in the USA. With Aave, a decentralized borrowing and lending protocol with over 11.78 billion dollars volume, you get an average of 2.43%. Aave has also introduced a concept known as “private pools” that allows institutions to practice and explore DeFi before entering the space. Grayscale Investments LLC, the world’s largest digital currency asset manager with an approximately 40 billion dollars AUM, has started a Decentralized Finance (Defi) fund with the intent to invest in top Defi protocols.
Organizations are also entering the cryptocurrency space with a particular interest in Bitcoin as a hedge against negative interest rates and inflation that eats away their corporate treasuries. Companies such as Tesla, SpaceX, MicroStrategy amongst others have already taken the plunge and will likely bring a string of followers with them. With the US economy flush with printed notes, liquidity is at an all-time high. This means there is no escaping inflation. With increased inflation comes decreased value in every dollar earned. This poses a big threat to investors, who are looking for smarter ways to beat inflation thus turning to Bitcoin or cryptocurrency, which while volatile, is poised for immense growth in the years and decades to come.
Goldman Sachs surveyed with 150 Family Offices and found 45% to be interested in crypto assets as a hedge against high inflation and low interest rates with 15% of them already invested in crypto. Family Offices are private wealth management advisory firms that serve ultra-high-net-worth investors. The 22% of surveyed participants are worth over 5 billion dollars and then we have 56 million millionaires all of whom are looking for the right opportunity to grow their investments. Jeetesh Tipe, Founder and CIO at MintingM, a professional crypto investment advisory firm based out of Mumbai, shared that over the last 6 months, an increased number of family office funds and corporates are seeking their advisory services and have begun diversifying their investments in cryptocurrency.
What started as a retail investment opportunity has quickly grabbed the interest of institutions, and it is only a matter of time until trillions of dollars flow from these institutions into this new asset class.
Sources:
Fidelity survey- https://bit.ly/3ybTniW
Goldman Sachs survey – https://bit.ly/3zGDQbk
Aave news for the institution – https://bit.ly/2TCHqno
Grayscale Defi Fund – https://bit.ly/3i49IAF
Aave APY – https://aave.com/
Aave value locked – https://defipulse.com/
Average savings APY in the USA- https://bit.ly/3rHzHRQ
Hedge fund AUM – https://cnb.cx/3iNXew4