How Are Institutions and Companies Investing in Crypto?

How Are Institutions and Companies Investing in Crypto?

Bitcoin is one way institutions are investing in crypto (Unsplash, modified by CoinDesk) For years, the idea that traditional finance institutions would invest in bitcoin ( BTC ) was laughable. But as of mid-2020, the institutional presence in the cryptocurrency became a reality. Many cite the foray of “the suits” into crypto as a contributing factor to the latest bull run that began in late 2020 and ended in late 2021.

Institutional interest in the cryptocurrency market excites current investors because institutions bring in fresh money, and certainly more money than retail can pour in.

Bitcoin, the largest cryptocurrency by market cap, is the gateway – and indeed the only stop – for many institutions that ventured into the cryptocurrency market. As of June 2022, 6.47% of all bitcoin that will ever exist is held by institutions, a broad category that includes ETFs like VanEck in Canada and sovereign governments like El Salvador . Bitcoin treasuries ( Although bitcoin is often the first and the final step for major institutions, experimental institutions have recently stepped into other parts of the crypto industry. NFTs and the metaverse are two intertwined sectors in which institutions actively invest – rather than just passively investing in a cryptocurrency like bitcoin.

The institutional presence in crypto began in earnest when MicroStrategy, helmed by Bitcoin maximalist Michael Saylor, bought $250 million worth of bitcoin in August 2020, followed by an additional $175 million in bitcoin one month later. MicroStrategy’s big step was followed by payments processor Square’s $50 million BTC purchase in October 2021 and EV manufacturer Tesla ’s $1.5 billion BTC in February 2021.

The first mover continues to be the biggest holder. MicroStrategy owns 129,218 BTC in its stashes, accounting for 0.615% of the 21 million bitcoin that will ever exist. Tesla comes in second with 42,902 BTC, or 0.204% of all the possible Bitcoin supply.

Institutional activity in crypto is a double-edged sword. In May 2021, Tesla reversed its decision to accept payments in bitcoin over environmental concerns after less than two months of trialing the cryptocurrency as a payment method for its cars. This about-face contributed to a large sell-off in the cryptocurrency market.

Bitcoin mining companies or groups , which receive bitcoin rewards for validating transactions on the network, are another category of institutions holding the largest cryptocurrency.

There are also indirect ways institutions invest in bitcoin. Exchange-traded funds, or ETFs, are the most common indirect form of investment. Although there are bitcoin spot ETFs in Canada and Europe, the financial instrument isn’t approved in the US. Instead, there are ETF-like instruments, like the Grayscale Bitcoin Trust , a closed-end trust that tracks the value of Bitcoin. (Grayscale Investments, which manages the trust, is a unit of Digital Currency Group, which also owns CoinDesk.) It had $18.5 billion worth of assets under management (AUM) as of June 2022.

Another alternative to bitcoin spot ETFs comes in the form of Bitcoin futures ETFs , which invest in bitcoin futures contracts. ProShares’ Bitcoin Strategy ETF (BITO), and several others, were approved in late 2021 by the SEC, ratcheting up the price to new highs.

Bitcoin as part of a retirement strategy is another recent development. In April 2022, Fidelity Investments, the largest 401(k) provider in the United States, began offering exposure to Bitcoin through its 401(k) plans. If employers approve, Americans could invest in the cryptocurrency through their retirement savings.

Decentralized finance is a corner of the crypto industry with billions of dollars locked into smart contracts. Smart contracts are self-executing pieces of code that enforce contractual agreements between parties. DeFi runs on smart contracts that power decentralized apps ( dApps ), which offer a range of financial services such as:

Although on the surface, DeFi looks like the opposite of traditional finance, both industries have overlapping interests; there have been innovative collaborations recently.

Some DeFi platforms actively try to lure institutional investors. DeFi lending protocol Compound set up in June 2021 an institutional gateway called Compound Treasury. S&P Global Ratings, a credit rating agency for traditional finance institutions, awarded Compound Treasury with a B- grade, which means the USDC -powered yield platform ranks as “speculative” but “currently has the capacity to meet financial commitments.”

In October 2021, French investment bank giant Société Générale (SocGen) submitted an application on MakerDAO’s governance forum for the lending platform to accept its on-chain digital covered bonds, OFH Tokens. These tokens were issued by the bank as collateral for a $42 million loan in stablecoin DAI. As of June 2022 , the negotiations over technical details continue.

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