2021 was the year that cryptocurrencies became a multi-trillion dollar asset class. A few years ago, only retail investors and traders invested in crypto; but everything changed with growing interest from institutions. Thanks to them, the market received a new influx of investments, helping to give greater legitimacy to the industry. Consequently, Bitcoin and many altcoins experienced all-time highs in 2021.
In this blog post, we will briefly look at who these institutional investors are, provide a short overview of investments for 2021, consider the benefits that institutional investments bring to the blockchain and crypto industry, examine what trends and investment prospects are opening up for 2022, and talk about the best ways to invest in the crypto industry if you’re looking to expand your portfolio.
Who are institutional investors in cryptocurrency?
In crypto news, you can often find news about the investments of both crypto venture funds, and institutional investors. Before moving on to discussing the prospects for institutional investment in cryptocurrency for the next year, let’s briefly outline who institutional investors are in the cryptocurrency industry and how money can be invested the sector.
Institutional investors are a legal entity or fund that specializes in investing their own or managed funds in financial assets in order to make a profit. These include insurance organizations, banks, investment funds, and other financial companies that manage large funds. They invest them in various assets: real estate, securities, precious metals, cryptocurrencies, and more.
Crypto Venture Investments — Cryptocurrency venture funds are investment companies that are focused on working with startups and other small projects with high-risk but also high-reward potential. Venture capital funds investing in blockchain and crypto companies include Galaxy Digital, Coinbase Ventures, Alameda Research, Andreessen Horowitz (a16z), and many more. These are funds for large capital — an ordinary investor cannot enter them.
Venture investments in cryptocurrencies have collectively exceeded $30 billion over the past year, as we mentioned in our previous blog post, and this was more than the total of all investments made in previous years.
Cryptocurrency funds are an important part of the crypto market’s infrastructure. They act as intermediaries between the crypto sector and institutional investors. According to Crypto Fund Research, over 72 funds opened in 2021. The peak was in 2017 where 291 crypto funds were opened.
Another way to invest is through trusts. Trusts buy coins, and investors purchase fund shares with these coins, paying a management fee. In fact, trusts allow investors to earn on the growth of cryptocurrencies without actually owning them. The largest trust by number of Bitcoins at the moment is the Grayscale Bitcoin Trust, with US$27.1 billion in investment.
Institutional investment overview 2021
In October, the Security and Exchange Commission (SEC) approved the first ETF for Bitcoin futures – in just two days, the size of the exchange-traded fund reached $1 billion. The predicted growth in the cryptocurrency rate attracted “big sharks”: as a result, in 2021, the share of institutional investors with investments from $1 million reached a record number, exceeding 70%.
Bitcoin inflows hit $6.3 billion and showed a 16%+ increase in 2021 compared to 2020 ($5.4 billion). In addition, the increase in demand and popularity of cryptocurrencies is evidenced by investors’ interest in altcoins such as Solana, Polkadot, Cardano, and Tron.
Benefits for the crypto industry from institutional interest
The arrival of institutional investors in the cryptocurrency market clearly means a step forward for the entire industry. The arrival of such large financial institutions in the cryptocurrency sphere indicates a level of safety, security, and a belief in the market’s longevity. Here are the advantages the crypto industry gets from increased institutional interest.
In addition to user trust, institutional investors bring billions of dollars into the industry, which positively affects the price of cryptocurrencies.
The crypto industry is still in an experimental phase, with hacking into both small cryptocurrency wallets and large exchanges. It is not easy for institutional investors to enter a market where it’s not safe for them to store assets, which has led to the emergence of services specifically for such players. For example, the American exchange Coinbase launched the Custody service in 2018, institutional-grade secure offline storage regulated by the New York State Department of Financial Services.
Acceleration of the legalization process
Last but not least, a huge advantage for the crypto industry from the inflow of institutional investors is the speedy creation of a regulatory framework regarding the circulation of cryptocurrencies. It is impossible to ignore a multi-trillion dollar industry, and when experienced players in the financial sector enter it, this pushes governments around the world to accelerate the process of regulation. Many experts agree that crypto regulation will help the mass adoption of cryptocurrencies and continue to attract institutional investors in the future.
Could the crypto winter harm adoption?
There is recently talk of an upcoming crypto winter, due to Bitcoin’s price collapsing from November’s ATH at $67,000 to just over $35,000 in mid-January. Cointelegraph released an article with tips on how to survive in a crypto bear market.
As with any market downturn, investors will shed their highly volatile assets, i.e. cryptocurrency. The crypto winter will indeed set back adoption, with big players reinvesting in other sectors, such as raw materials, agriculture, logistics, food, and others.
However, another matter arises: whether the crypto winter will indeed arrive in the coming year. Banks and investment companies continue to actively join cryptocurrency investments. Tesla has invested $1.5 billion in Bitcoin. BITQ launched the Bitwise Crypto Industry Innovators ETF based on the shares of 30 public companies from the crypto industry. Hundreds of billions of dollars are pumped into the cryptocurrency, and it is unlikely that all there will be a downturn as severe as what we saw in 2018/2019.
It’s important to understand the difference between a temporary decline and a crypto winter. The former is characterized by a decline of 20-50%, while crypto winters (taking into account the previous one) usually involve depreciation of 80%+ over a long period of time.
Ways to grow your crypto portfolio
If you have been thinking about cryptocurrency investment and want to expand beyond simply trading, here are some other ways you can invest.
As one of the best ways to make money on cryptocurrencies, investors are considering cryptocurrency mining. Mining no longer requires the purchasing of expensive equipment, rental location, and electricity costs. Mining As a Service (cloud mining) is now actively developing. Many mining companies offer their services in the form of a financial product, the profitability of which is tied to the mining process, while the miners assume all operational risks. The product is ideal for those who would like to have financial investments in this sector, but are not ready to bear the operational and regulatory risks that are traditionally inherent to this activity.
Staking is a way to earn passive income, in which users store coins on the Proof of Stake (PoS) algorithm, ensuring the health of the blockchain through helping to verify transactions. This feature is available to cryptocurrencies that run on PoS, such as EOS, Tezos, TRON, Cosmos, and NEAR. The more tokens a holder has, the more likely it is that he will become the creator of a new block, meaning increased rewards.
Farming is the process of accruing tokens in return for providing liquidity to a project by placing a certain pair of tokens in a pool. Liquidity pools are a kind of storage of tokens that provide the process of trading a particular currency pair, receiving liquidity from users who in return receive a reward from the project depending on the share they invested.
Lending involves the temporary transfer of cryptocurrency for a percentage return. A crypto investor lends either to exchanges in order to increase liqudity, or to individuals. The transferred funds are locked in a smart contract.
Crypto investments future outlook
One of the key trends that makes it possible to positively assess the prospects for Bitcoin and other altcoins in 2022 is the degree of its adoption. The Global Cryptocurrency Adoption Index from Chainalysis, which includes 154 countries, has grown by 881% compared to 2020.
Bitcoin has already proved its worth after another ban from the Chinese authorities, and this only strengthened the belief in its sustainability.
The legal regulation of the crypto market in several countries has attracted large institutional players to the market with more significant investments, which are aimed at the long-term accumulation of digital assets. For example, last year Ukraine adopted the law “On Virtual Assets,” thanks to which market participants will be able to open accounts for operations with crypto assets. Analysts expect regulation to be a key issue for the crypto industry in 2022, which should open the door to more institutional adoption.
Another expected event among institutional investors is entering the US stock market with the first spot Bitcoin exchange-traded fund. As we stated above, the US Securities and Exchange Commission has already permitted Bitcoin Strategy ETF to trade Bitcoin futures contracts, but not the cryptocurrency itself. With the approval of the first physical Bitcoin ETF, we can expect an even greater inflow of funds into the cryptocurrency.
Overall, 2021 has been a busy year for the crypto industry, and 2022 promises to be just as exciting. We at INC4 believe that cryptocurrencies and blockchain are iconic innovations that will undoubtedly impact the global financial system, and investors should be able to participate in this transformation. This is evidenced by both the growth of investments in cryptocurrency and venture investments aimed at the development of blockchain technology. Blockchain is a good software solution for increasing security and efficiency for any organization, such as management, tracking, storage, digital recording, automation, and more. If you are interested in blockchain benefits for your business, please contact our specialist for a free consultation.