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Institutional Investors and Cryptocurrency

 

Cryptocurrencies have seen significant gains over the last year. From this particular asset class, Bitcoin has seen a significant appreciation in terms of its price. This article discusses why Bitcoin is set to appreciate even further over the coming year. Not waste any time, let us begin!

The Arrival of Institutional Investors and Smart Money

During the last year, a fair number of institutional investors and noteworthy individuals in the world of investments have taken bullish positions on Bitcoin. Merchant payment services like Square and Paypal have been buying noteworthy quantities of Bitcoin. Stances of support have also been taken by industry veterans such as Paul Tudor Jones and Rick Reider being among them.

 

Microstrategy, Massmutual, One River Asset Management and Ruffer Investment represents an unaligned group of institutions that have collectively spent $2.490 Billion acquiring Bitcoin. Another indication of the increased inflow into Bitcoin would be that CoinBase has seen a $14 Billion increase in the Bitcoin it has under custody. More importantly, this trend is expected to continue in 2021.

 

Beyond institutions buying Bitcoin, the crypto-ecosystem has seen funds flow in the direction of infrastructure that is aimed at supporting the storage and purchase of cryptocurrencies. Over the past few weeks Coinbase experienced technical difficulties that have negatively impacted the price of cryptocurrencies. These difficulties are a result of the surge in the price of Bitcoin. In order to nullify this occurrence, it has acquired Routefire in order to improve its trading infrastructure.

 

A final point to mention would be that companies like the Chicago Mercantile Exchange and Standard and Poor will start offering more cryptoassets on their platforms, helping to further widespread adoption. This follows the lead of companies like the ETC, which already offer an Exchange Traded Product that tracks the price of Bitcoin. At this current point, the crypto-ecosystem is seeing an increase in network effects. For more information in that regard, look here.

 

Central Bank Digital Currencies(CBDCs)

Another important development in the world of cryptocurrencies would be the creation of Central Bank Digital Currencies. According to the bank of International Settlements, CBDCs can be defined as a digital form of central bank money that it different from balances in traditional reserve or settlement accounts

 

Some central banks, like the one in Sweden, are driven by a sense of necessity in their development of a digital currency, because citizens in Sweden rarely make use of physical cash when juxtaposed to other citizens in developed nations.

 
 
 

Other central banks, like the one in China, are developing their digital currencies with the intention of being a leader in this new technology on a global scale. Doing so would give it an advantage over America, and thus further cement its position as a leading super power.

 

The brief discussion on the ekrona and the Digital Yuan indicate that even though both central banks mentioned above are developing their own digital currencies, they are driven by different incentives. As such it can be expected that the digital currencies they deliver will have a variety of similarities as well as critical differences.

 

Which brings us to an important diagram in the discussion on CBDC’s: the money flower. This clever Venn Diagram helps to illustrate the different categories of money, and also the different types of CBDCs that therein exist.

 
 

In addition to China and Sweden, countries that have recently concluded experiments on Digital Currency backed by blockchain include(but are not limited to) : Canada, the UAE, Saudi Arabia, Japan and Singapore. How CBDCs compete with private cryptocurrencies like Bitcoin remains to be seen. One thing for sure though, they are coming.

 

Worldwide Regulatory Developments

In the first theme introduced in this article, The Arrival of Institutional Investors and Smart Money, mention was given to standardized crytpocurrency offerings by companies such as SnP and the CME. The most significant drawback in this regard would be regulation, although noteworthy strides have been made towards that end.

 

For instance, Germany has legalized electronic securities on the blockchain. In addition to this, the US Federal Regulator says banks can conduct payments using stablecoins, a type of cryptocurrency. Following the regulator passing this legislation, a firm known as Anchorage which offers custodial services for owners of Bitcoin and other services, became the first approved cryptocurrency bank in the United States, a significant achievement for the cryptocurrency ecosystem!

 

The two instances mentioned above represent positive regulatory developments for cryptos, even though these are not the only ones. A report that provides a more thorough analysis of crypto regulation, conducted at Cambridge University’s Judge Business School, can be found here.

 

Negative regulatory actions against crypto can be seen from the UK banning all crypto derivatives in that particular region of the world. This move has been seen as stifling innovation for blockchain development by active participants. What seems to be a neutral stride comes from the ECB’s Christine Lagarde, who has called for the regulation of cryptocurrency on a global scale. To guess what this cross-border initiative will look like requires patience; its best to wait and see what happens.

 

Conclusion

Bitcoin has seen tremendous price appreciation over the last three months alone, mainly because of the type of investor it has attracted. Catering crypto products to institutional investors has a positive effect on the crypto ecosystem in general, because this type of investor purchases bitcoin in bulk. Like land, there is only a finite amount of bitcoin available. As demand for it continues to increase, there’s really only one place for it to go. Complement this article with the following video.

 

References

Central Bank Cryptocurrencies, bis.com

Central Bank Digital Currencies, bis.com

The Riksbank’s e-krona pilot, riksbank.se

Explainer: How does China’s Digital Yuan Work?, reuters.com

Bilateral Saudi, UAE Currency Experiment Shows Benefit of Distributed Ledgers, Central Banks Say, coindesk.com

Japan Gearing up to Launch its own Digital Currency: Report, coindesk

Bitcoin goes Mainstream as Paypal and Square Embrace Digital Currencies, barrons.com

CaseBitcoin, twitter.com

S&P Dow Jones Indices to Launch Crypto Indexes in 2021, nasdaq.com

Ether futures, thecmegroup.com

Germany Legalizes Electronic Securities on the Blockchain, nasdaq.com

US Federal Regulator says banks can conduct payments using stablescoins, coindesk.com

Anchorage becomes first OCC-Approved national crypto bank, coindesk.com

3rd Global Crypto Asset Benchmark Study, cambridge.ac.uk

FCA Crypto Ban Is A Setback For The U.K. In Race To Lead The Growing Global Digital Assets Market, Forbes.com

ECB Chief Christine Lagarde Calls for Global Bitcoin Regulation — Says BTC Conducts ‘Funny Business’, Bitcoin.com

Bitcoin securities trading surges as investors seek crypto exposure, financialtimes.com

169-Year-Old MassMutual Invests $100 Million in Bitcoin, bloomberg.com

Coinbase Has Raked in $14B in New Institutional Assets Since April, coindesk.com

Coinbase acquires trading execution platform Routefire, cointelegraph.com

Network effects, youtube.com

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