Are Institutional Investors the Most Important Silent Partners of Crypto?

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Imagine an institutional investor like an insurance company or pension fund decides to test the waters of the cryptocurrency. Or maybe a large company wants to buy Bitcoin (BTC) to diversify its treasury holdings. One thing they probably won’t do is announce their intention in advance. This could drive up the price of the digital asset they are looking to buy.

As a result, there is often a delay between the action of a large institution – for example, buying $ 100 million in Bitcoin – and its public announcement. “Institutional participation flows in cycles,” Diogo Mónica, co-founder and president of the crypto custodian Anchorage Digital, told Cointelegraph. “When you hear about a new company adding crypto, we’ve usually talked to them for many months.”

Has something like this happened in the recent price surge – when Bitcoin, Ether (ETH) and many other cryptocurrencies hit all-time highs? Did corporations and institutional investors secretly gobble up crypto in the early fall – so as not to raise the price while they were in the accumulation phase – and its effects only became apparent this week?

Why the Biggest Investors?

Kapil Rathi, CEO and co-founder of the institutional cryptocurrency exchange CrossTower, told Cointelegraph, “Institutions have definitely been initiating or increasing bitcoin allocations lately.” Much of this could have started in early October, he conceded as large investors likely tried before Launch of ProShares’ exchange traded fund (ETF) – and it then became a seller after launch – but still “there” was strong passive support that kept prices stable. This purchase support, in the way it was carried out, looked much more like institutional accumulation than retail purchases. “

James Butterfill, investment strategist at the digital asset investment platform CoinShares, warned that his company’s data is only anecdotal – “since we can only rely on institutional investors to tell us whether they bought our ETPs” – but “we do.” see an increasing number of investments ”. Funds are reaching out to discuss whether Bitcoin and other crypto assets may be added to their portfolios, ”he told Cointelegraph, adding:

“Two years ago, the same funds thought Bitcoin was a crazy idea; A year ago they wanted to discuss it further; and today they are more and more concerned about losing customers if they don’t invest. ”

The main investment rationale, added Butterfill, “appears to be diversification and a monetary / inflation hedge”.

That stake need not necessarily come from the most traditional institutional investors – i.e. pension funds or insurance companies – but rather target family offices and funds of funds, according to Lennard Neo, research director at Stack Funds, “but we are seeing an increase in risk appetite and interest, especially for certain crypto sectors – NFTs, DeFi etc – and broader mandates outside of Bitcoin. “Stack Funds is getting two to three times more inquiries from investors than it did at the beginning of the third quarter, he told Cointelegraph.

Why now?

Why the seemingly increased institutional interest? The reasons are myriad, ranging from “speculative to those looking to hedge against global macroeconomic uncertainties,” Neo said. However, several have recently stated that they are “becoming an integral part of a global digital economy” with blockchain and crypto.

Freddy Zwanzger, co-founder and chief data officer of the blockchain data platform Anyblock Analytics GmbH, saw a certain fear of missing out here, or FOMO, and said to Cointelegraph: “Where in the past crypto investments were a risk for managers – it could go wrong – now it’s becoming increasingly risky not Allocate at least part of the portfolio in crypto, as the stakeholders will have examples from other institutions that have made an allocation and have benefited greatly from it. “

The fact that big financial firms like Mastercard and Visa are starting to support crypto on their networks and even buying non-fungible tokens has only strengthened the FOMO, Zwanzger suggested.

“The interest of institutional investors and family offices gradually increased over the course of the year,” Vladimir Vishnevskiy, director and co-founder of St. Gotthard Fund Management AG, told Cointelegraph. “The approval of the BTC ETF in October only exacerbated this trend as there is now a much easier way to gain that exposure.” Inflation concerns are high on the agenda for many institutional investors, “and crypto will go with gold seen as a good hedge for this ”.

Public companies looking for crypto for their balance sheets

What about corporations? Have more bought bitcoin and other cryptocurrencies for their corporate coffers?

Brandon Arvanaghi, CEO of Meow – a firm that enables corporate treasury to participate in crypto markets – told Cointelegraph that he is seeing a new receptivity among corporate finance chiefs to crypto, particularly amid the global pandemic:

“When inflation is around 2% and interest rates are reasonable, corporate treasurers don’t think about looking for alternative investments. […] COVID has turned the world upside down, and inflationary pressures are not only leaving corporate treasurers open to alternative sources of return, but actively seeking them. “

“From our point of view, we see that more and more companies are buying crypto in order to diversify their corporate coffers,” commented Mónica. In addition, “Banks are turning to us to meet demand for these types of services, suggesting a bigger trend beyond just companies adding crypto to their balance sheets. […] That means that soon more people will have direct access to crypto through the financial instruments they are already using. “

Macro trends encourage companies to include crypto on their balance sheets, Marc Fleury, CEO and co-founder of fintech company Two Prime, told Cointelegraph. “Note the fact that corporate cash for publicly traded US companies has increased from $ 1 trillion in 2020 to $ 4 trillion in 2021, and you can see why many are looking for new places to get those extra Using cash and why this trend won’t let up. ”

Meanwhile, the number of public companies that have announced they hold Bitcoin has grown from 14 last year to 39 today, with the total amounting to $ 13.7 billion, Butterfill said.

Speaking of companies, are more companies willing to accept crypto as a means of payment for their products and services? Recently it was rumored that Tesla is on the verge of (re) accepting BTC as a means of payment for its cars.

Mónica told Cointelegraph, “Fintechs are reaching out to us to help them support not just Bitcoin but a wide variety of digital assets, suggesting that large companies on a broader basis are more willing to support crypto payments.”

For his part, Fleury doubted that cryptocurrencies – with one notable exception, stablecoins – would ever be widely used as a medium of exchange. “Volatile cryptos like BTC and ETH are not good for payments. Period, ”said Fleury. What makes crypto great as a reserve currency makes them bad barter almost on purpose, he said, adding, “Stablecoins are a different story.”

Is the stock-to-flow model convincing?

There has been a lot of talk in the crypto community about the so-called stock-to-flow model (S2F) for predicting Bitcoin prices. In fact, the anonymous institutional investor PlanB’s S2F model predicted a BTC price of> USD 98,000 by the end of November. Are institutional investors taking the stock-to-flow model seriously?

“A lot of institutional investors ask us this question,” Butterfill says, “but when they look at the model, they don’t find it believable.” Stock-to-flow models often extrapolate future data points beyond the current data range of a regression set – one statistically dubious practice.

In addition, the method that compares the existing supply (“inventory”) of an asset with the amount of new supply that comes onto the market (“flow”) – for example through mining – “for other assets such as gold”, Butterfill said, adding, “Other approaches have been taken in recent years to improve the S2F model, but it is losing credibility with customers.”

“I don’t think the institutes pay too much attention to the stock-to-flow model,” agreed Rathi, “although it’s hard to slander because it has so far proven to be quite accurate.” It appears at Being more popular with retailers than institutions, he said. Vishnevskiy, on the other hand, was not ready to discard the stock-to-flow analysis so quickly:

“Our fund looks at this model along with over 40 other metrics. It’s a good model, but not to be used alone. You need to use it with other models and also consider the fundamentals and technical indicators. “

If not institutions, who is driving prices up?

Given that institutional involvement in the recent crypto run-up seems largely anecdotal at this point, it’s worth asking: If corporations and institutional investors haven’t gobbled up most of the cryptocurrency floating around, who has?

“It makes sense that this was a retail-driven phenomenon,” replied Butterfill, “as we saw the birth of a new asset class and the associated confusion and reluctance of regulators.” This regulatory uncertainty remains a persistent drag on institutional participation he suggested, adding:

“In our most recent survey, regulations and company restrictions were the most common reasons not to invest. The survey also found that institutions with much more flexible mandates such as family offices have much larger positions compared to asset managers. “

Even in the absence of unequivocal data confirmation, many believe that institutional participation in the digital asset market is increasing. “As crypto security, technical infrastructure and regulatory clarity have improved over the years, this has opened the door for wider institutional involvement in the sector,” Mónica told Cointelegraph, adding:

“In the years to come, we will see many lines of payment via crypto, including stable coins and DeFi. I also expect that we will see more interconnectivity between blockchain-based payment channels with older ones. “

For Fleury, the trend is clear. “Pension funds, foundations, sovereign wealth funds and the like will add crypto to their portfolio in the next cycle.” However, they are cautious investors and it takes time to do the necessary due diligence.

Related: Crypto and pension funds: like oil and water, or not?

But once institutional investors get involved, they tend to increase their exposures quickly, he added. “We are still at the beginning of this institutional cycle. We will see a lot more interest from pension funds. ”

At this point, a single $ 1 billion crypto transaction – like the one that took place in late October and set a record – becomes an “everyday occurrence,” Fleury said.