The Long Game: Institutional Interest in Crypto is Just Beginning

Author: SHIRAZ JAGATI, Cointelegraph

Original Title: 《 The long game: Institutional interest in crypto is just getting started》

Translation by: Linqi, Chain Catcher

"The cryptocurrency market is not for the faint-hearted" has been fully exemplified recently, when the total market capitalization of the industry fell to a relative low of $1.75 trillion on September 20, only to make a strong "comeback." However, despite these fluctuations, the demand from institutional investors remains robust, with reports indicating that large players have recently continued to "buy the dip," especially following China's recent comprehensive ban, which allowed short sellers to control the market, albeit temporarily.

Related reports show that in the last week of September, digital asset investment products brought in $95 million in inflows for institutional crypto investment products, with BTC and ETH leading with inflows of $50.2 million and $28.9 million, respectively. In fact, over the past 30 days, inflows into Bitcoin products have surged an average of 234% weekly.

It is also worth mentioning that since April, U.S. investment bank Morgan Stanley has doubled its total holdings in Grayscale Bitcoin Trust (GBTC), as revealed in a report submitted to the U.S. Securities and Exchange Commission (SEC) on September 27.

Finally, investment management giant Ark Invest, led by CEO and crypto bull Cathie Wood, has also been in a buying frenzy for GBTC, recently acquiring over 450,000 shares of GBTC through two separate purchases, bringing its total trading volume to a substantial 8.3 million GBTC shares.

Institutional Demand is Growing

Luuk Strijers, Chief Business Officer of crypto options exchange Deribit, stated that large banks like Morgan Stanley, Citigroup, and Goldman Sachs are beginning to offer a wide range of digital assets to their clients, adding:

"We haven't seen them become active on offshore derivatives platforms yet. However, we do see secondary companies, asset management firms, and hedge funds becoming increasingly active, either investing/trading aggressively or hedging venture risks."

He pointed out that currently about 20% of Deribit's options trading volume is conducted as over-the-counter trades, a figure that previously hovered around 5% to 10%. He explained, "Given the scale of these trades, it clearly involves institutional parties, and these trades execute better in a block compared to multiple trades on-screen."

Finally, Stijers noted that traditional financial institutions prefer trading futures and options rather than perpetual products, as perpetual products are often viewed as short-term risk products due to the unpredictability of their funding. "Compared to many of our peers, Deribit has a larger open interest in futures because about 80% of our trading volume is driven by institutions," he said.

Playing the Long Game

Elena Sinelnikova, co-founder and CEO of Ethereum Layer 2 aggregation platform Metis, stated that retail investors often overlook the consolidation period and only turn their attention to the crypto industry when the market is rising. On the other hand, institutional investors know that the best accumulation opportunities arise when the market is down and/or stagnant, indicating a longer-term outlook. She said:

"We have experienced enough market cycles to know that the kind of pullback we have seen in the past few months typically occurs before a significant upward trend. While no one can predict the future (in crypto or otherwise), institutions are taking advantage of this calm period to load up their bags in anticipation of another big rise."

Additionally, Sinelnikova pointed out that investors need to remember that different phases of the market yield vastly different outcomes. "Keep a close eye on Bitcoin's dominance data to see whether Bitcoin or altcoins (or both) drive the next market uptrend," she said.

Douglas Horn, chief architect of the scalability-focused blockchain network Telos, shares a similar view, suggesting that institutional investors can be likened to supertankers, meaning they require a significant amount of time and effort to get moving, but once they do, it is hard to stop them again. He said:

"Once they have decided to enter the crypto space, they won't be deterred by some temporary volatility. If anything, they won't accumulate cryptocurrencies during a downtrend. When these investors buy their first Bitcoin, they have certainly spent years evaluating and formulating their goals. The way institutional investing operates is fundamentally different from typical cryptocurrency investors and traders."

Horn indicated that, for now, companies like MicroStrategy have laid the groundwork for others, and a significant number of new institutional investors are conducting their own due diligence on the long-term viability of investing in the digital asset market.

Not Everyone is Fully Convinced

Philip Gunwhy, Chief Marketing Officer of the NFT ecosystem Blockasset, stated that while institutional acceptance of Bitcoin has been increasing over the past few months, some remain cautious, especially as the regulatory environment surrounding this emerging industry continues to heat up. In his view:

"Unless formally announced, it is impossible to determine these investors' buying patterns. While Morgan Stanley has recently increased its investment in Bitcoin, many institutional investors are opting for venture capital, injecting funds into companies that provide Bitcoin-related services."

Despite Gunwhy's perspective, Wes Levitt, head of strategy at decentralized video streaming platform Theta, stated that institutional capital is still flowing into the blockchain space, as evidenced by the over $17 billion in crypto venture capital funding in the first half of 2021. He said:

"Perhaps due to the crash in May, it undoubtedly scared many traditional investors, leading to a diminished interest in direct exposure to BTC/ETH, but reports indicate that institutional capital flows in September were still in surplus. As always, reports of the death of cryptocurrency have been greatly exaggerated."

Looking Ahead to the Market

Joshua Frank, co-founder and CEO of crypto and blockchain analytics provider TheTIE, stated that the demand from traditional companies his firm is seeing is astonishing.

"There are dozens, if not hundreds, of proprietary trading firms, hedge funds, and other asset management companies with a scale of $1 billion that have recently conducted their first crypto trades," Frank said.

He further noted that while some funds have made high-profile announcements about investing in crypto, many more such developments are happening behind the scenes, unbeknownst to the public. Frank mentioned that typically, such operations start simply, with the fund using partner capital for cash-and-carry Bitcoin trades as a proof of concept, and then grow over time, adding:

"We find these funds are getting deeper into the 'rabbit hole.' We have at least 5-10 clients, all of which are among the top 50-100 hedge funds actively hiring crypto teams."

Finally, according to a recent survey, an increasing number of traditional financial entities are eager to enter the digital asset trading/investment space. The report states that approximately 62% of global institutional investors who have not yet engaged with cryptocurrencies indicated that they wish to enter the crypto market within the next 12 months.

The survey considered the views of 50 wealth management institutions and 50 institutional investors from various countries, including the U.S., U.K., France, Germany, and the United Arab Emirates. The report stated: "There is no doubt that the crypto asset market is becoming increasingly mainstream in the institutional and wealth management sectors."

As the crypto industry continues to grow, both from an infrastructure and regulatory perspective, it will be interesting to keep an eye on the increasing adoption rates among these institutions.