Will Smart Money Help The Crypto Industry Evolve?

Blockchain development blog 3

Will this year be a year of change for the crypto industry? Some signs point to yes. Institutional investors are coming, bringing with them plenty of speculation. One way or another, we are now witnessing the next step in the evolution of the industry. Although cryptocurrency is not yet a part of everyday life, it’s certainly heading in that direction.

Until quite recently, it was believed that cryptocurrency investors were mostly young people with a passion for risk-taking. Crypto was seen as the currency for those who weren’t interested in investing large sums of money, or who didn’t have large sums of money in the first place. This year, however, this “smart money”, has found a haven in the industry.

“Smart money” is the term for capital that is under the control of institutional investors, such as big market players, major banks, and financial professionals. These investors are highly experienced and very well informed, usually preferring safe and stable trends: buying US dollars, relying on the stock market, and investing in traditional natural resources, such as oil.

The current global pandemic, followed by an economic downturn, has led to instability in most markets. In April 2020, the price of oil dipped below zero for the first time in history. The value of the American dollar is also dropping: since reaching peak figures in March, the US dollar has dropped more than 12% when compared to six other major world currencies. These statistics have caused investors to reevaluate the crypto market as a stable opportunity once again.

The year of change for the Bitcoin industry

This year highlighted the unexpectedly fast rebound of Bitcoin’s worth. Currently, it is the top trending cryptocurrency to date. 

Just last year it lost nearly 70% of its value in what some referred to as a “crypto winter”. Today, the price of BTC is setting new records, worldwide. It recently went as high as $19,920.53, as of December 1st. One of the reasons for this rapid increase in value was due to the arrival of “smart money”; however, other factors were also at play that led to this Bitcoin resurgence. 

When we analyze the data from Google Trends, we can see that the interest in Bitcoin this fall is significantly lower than it was three years ago (the previous time that it reached its record price). Still, the demand is overwhelming — while the broad public loses interest, institutional investors are showing up with more money. 

Additional proof can be spotted when analyzing the geography of Google Trends. In America, the states with the highest per capita income are most interested in Bitcoin, including California, Nevada, Hawaii, Washington. Meanwhile, Silicon Valley (San Francisco and San Jose) is the top metro region for Bitcoin interest. Another reason for such a spike in value may be due to the fact that PayPal entered the cryptocurrency market, opening the possibility to buy and sell Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. These coins could then be used to buy products and services from sellers that accept PayPal. The payment platform has already been granted a “Bitlicence” — governmental permission for such an operation.

There are even some famous names among Bitcoin investors, including Paul Tudor Jones, an American billionaire hedge fund manager, and Goldman Sachs. Grayscale, digital currencies investing and cryptocurrencies asset management firm is buying more than ever. As of November, the company managed a total of $10 billion worth of Bitcoin. Its total investments comprise 2.29% of Bitcoin’s entire market cap. Such a demand led to a sharp increase in the price of BTC.

DeFi — a promising opportunity

Decentralized finance, or DeFi, is an approach that draws enormous attention these days. The term refers to the different financial applications that do not need any intermediaries, such as banks or other institutions. These contracts are performed automatically and are valued for their safety because they don’t allow people to intervene. Compared to previous services, such as centralized crypto exchanges, DeFi provides more complex financial services, such as lending platforms and prediction markets with all actions based on open protocols.

The popularity of DeFi contracts is increasing dramatically. During the last three years alone, the total value of them grew from $2.1 million USD to $6.9 billion. Moreover, in the last four months, it has risen by more than $3 billion USD.

Total transparency of the ecosystem and the absence of intermediaries has caused DeFi projects — most of which were platforms for lending and borrowing money, such as Aave and Maker, or exchanges like Curve Finance —  to become highly profitable and efficient. As small investors spotted the opportunity to get larger returns faster, they began pouring money into DeFi — Institutional investors were soon to follow.

Major players have become more involved in crypto, DeFi in particular According to Business Reporter, “many high-street financial institutions are beginning to accept DeFi, and seeking ways to participate…In this climate, DeFi potentially offers much higher returns than high-street institutions”.

On the verge of global change

Another sign of future change is the novelties to be gained by governments and the central banks of many countries. They are not simply just watching the digitalization that is occurring around them, they are willing to be a part of the process, implementing regulatory legislation.

Some governments are even issuing Central Bank Digital Currencies (CBDC), with projects underway in Thailand, Australia, France, and Hong Kong, to name a few. It is apparent that the authorities are trying to take over the initiative in order to keep control of transactions that are based on blockchain technology. Using regulatory leverage, they are making market players, such as centralized exchanges, identify their users.

What 2021 will bring

Looking at the trends, it is safe to conclude that the arrival of institutional investors to the crypto market this year is only the first important step of a much larger transformation of the whole industry. With institutional investors, such as large financial companies, national banks, as well as private investors, the future of digital currency seems bright.

The appearance of these major players will only make the industry more stable and predictable, limiting price spikes and dramatic drops. As “smart money” is only found in the places where it can multiply, the industry is evolving naturally and is not going anywhere.

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