Are institutional investors the key silent partners of crypto?


Imagine that an institutional investor like an insurance company or a pension fund decides that it wants to try the cryptocurrencies. Or maybe a large corporation is looking to buy some Bitcoin (BTC) to diversify its treasuries. One thing they probably won’t do is announce their intention in advance. That could raise the price of the digital asset they are trying to buy.

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

Did something like this happen in the recent price increase – when Bitcoin, Ether (ETH) and many other cryptocurrencies reached all-time highs? Did corporations and institutional investors secretly swallow crypto through the early fall – so as not to raise the price while they were in an accumulation phase – with its impact only evident this week?

Why the biggest investors?

Kapil Rathi, CEO and co-founder of institutional cryptocurrency exchange CrossTower, told Cointelegraph, “Institutions have definitely initiated or increased Bitcoin allocations recently.” Much of it may have started in early October, he allowed, as large investors likely tried to get in before the launch of a ProShares exchange-traded fund (ETF) – and it then became a seller after the launch – but still, “there was strong passive support that kept prices stable. This buying support looked much more like an institutional build-up than retail buying in the way it was implemented. “

James Butterfill, an investment strategist at digital investment platform CoinShares, warned that his company’s data is only anecdotal – “because we can only rely on institutional investors who tell us if they bought our ETPs” – but “we see a growing number of investments “. funds are being contacted to discuss possibly adding Bitcoin and other cryptocurrencies to their portfolios, ”he told Cointelegraph, further explaining:

“Two years ago, the same financiers thought Bitcoin was a crazy idea; a year ago, they wanted to discuss it further; and today, they are becoming increasingly concerned that they will lose customers if they do not invest. ”

Butterfill added that the key investment ratio “seems to be diversification and monetary policy / inflation hedge.”

This participation may not necessarily be from the most traditional of institutional investors – ie pension funds or insurance companies – but more declined to family offices and funds, according to Lennard Neo, head of research at Stack Funds, “but we do see an increase in risk. appetite and interest, especially for specific crypto sectors – NFTs, DeFi, etc. – and broader mandates outside of just Bitcoin. ” Stack Funds is receiving two to three times more requests from investors than it received early in the third quarter, he told Cointelegraph.

Why now?

Why the apparent increased institutional interest? There are many reasons, ranging from “the speculative to those who want to protect against global macro uncertainties,” Neo said. But several have recently stated that they have seen “blockchain and crypto become an integral part of a global digital economy.”

Freddy Zwanzger, co-founder and chief data officer of blockchain data platform Anyblock Analytics GmbH, saw a certain amount of fear of missing, or FOMO, at stake here, telling Cointelegraph, “Where in the past, crypto investing was a risk for managers – it could fail – now it is becoming more and more a risk no to allocate at least some of the portfolio into crypto, as stakeholders will have examples from other institutions that have indeed allocated and benefited greatly. “

The fact that big financial companies like Mastercard and Visa are starting support crypto on their networks and even purchase unbreakable tokens only intensified the FOMO, Zwanzger suggested.

“Interest from institutional investors and family offices has grown steadily over the year,” Vladimir Vishnevskiy, director and co-founder of St. Louis, told Cointelegraph. Gotthard Fund Management AG. “The approval of the BTC ETF in October only exacerbated this trend, as there is now a much easier way to get this exposure.” Concerns about inflation are high on the agenda of many institutional investors, “and crypto is viewed as a good hedge for this along with gold.”

Public companies look at crypto for their balance sheets

What about corporations? Have they bought more Bitcoin and other cryptocurrencies for their corporate treasuries?

Brandon Arvanaghi, CEO of Meow – a company that enables corporate treasury participation in crypto markets – told Cointelegraph that he sees new acceptance from the company’s chief financial officers in relation to crypto, especially after the global pandemic. :

“When inflation is at 2% and interest rates are acceptable, corporate cashiers don’t think about looking for alternative assets. […] COVID has turned the world upside down, and inflationary pressures are making corporate treasurers not only open to but actively looking for alternative sources of return. “

“From our point of view, we are seeing more companies buying crypto to diversify their corporate treasuries,” Mónica commented. In addition, “Banks are contacting us to meet the requirement for these types of services, which indicates a greater trend beyond just companies adding crypto to their balance sheet. […] It means soon that more people will have direct access to crypto through the financial instruments they already use. “

Macro trends are urging companies to add crypto to their balance sheets, Marc Fleury, CEO and co-founder of fintech firm Two Prime, told Cointelegraph. “Consider the fact that liquid corporate cash for U.S. publicly traded companies has soared from $ 1 trillion in 2020 to $ 4 trillion in 2021, and you can see why many are looking for new places to deploy this extra money and why this trend will not decrease . ”

Meanwhile, the number of publicly traded companies announcing that they hold Bitcoin has risen from 14 this time last year to 39 today, with the total amount held at $ 13.7 billion, Butterfill said.

Speaking of corporations, are more companies willing to accept crypto as payment for their products and services? Recently, Tesla was rumored to accept BTC as payment for its cars (again).

Monica told Cointelegraph, “Fintechs is contacting us to help them support not only Bitcoin, but a variety of digital assets, suggesting that in the broader scheme, large companies are becoming more willing to support crypto payments.”

Fleury, for his part, doubted that cryptocurrencies – with one notable exception, stable currencies – would ever be widely used as an exchange. “Volatile cryptocurrencies like BTC and ETH are not good for payments. Period,” Fleury said. What makes crypto great as a reserve currency makes them poor exchange money, almost by design, he said, adding, “Stablecoins are another story.”

Is the stock-to-flow model convincing?

Much has been done in the crypto community about the so-called stock-to-flow model (S2F) to predict Bitcoin prices. Indeed, the anonymous institutional investor PlanB’s S2F model predicted a BTC price of> $ 98,000 by the end of November. Do institutional investors take the stock-to-flow model seriously?

“A lot of institutional investors are asking us this question,” Butterfill said, “but when they look deeper into the model, they don’t find it credible.” Stock-to-flow models often extrapolate future data points beyond the current data range of a regression set – a dubious practice, statistically speaking.

In addition, the method, which compares the existing stock of an asset (“stocks”) with the amount of new stock entering the market (“flow”) – through mining, for example – “certainly did not work for other fixed assets assets such as gold,” said Butterfill, adding, “In recent years other approaches have been made to improve the S2F model, but it is losing credibility with customers.”

“I don’t think institutions are paying too much attention to the stock-to-flow model,” Rathi agreed, “although it’s hard to slander it because it has so far proven to be fairly accurate.” It seems to be more popular at retailers than at institutions, he said. Vishnevsky, on the other hand, was not prepared to reject stock-to-flow analysis so quickly:

“Our fund looks at this model along with 40+ other metrics. It’s a good model, but not usable alone. You have to use it along with other models and also consider the basics and technical indicators.”

If not institutions, who raises prices?

Considering that institutional participation in the latest crypto career seems largely anecdotal at this point, it is worth asking: If corporations and institutional investors haven’t devoured most of the cryptocurrency floating, who is?

“It makes sense that this was a phenomenon driven by retail,” Butterfill replied, “because we have witnessed the birth of a new value class, and with that comes confusion and hesitation from regulators.” This regulatory uncertainty remains a lasting impediment to institutional participation, he suggested, adding:

“In our most recent survey, regulations and corporate restrictions were the most cited reason for not investing. The survey also found that those institutions with much more flexible mandates, such as family offices, have much larger positions compared to wealthy managers.

However, even if inevitable confirmation of data is lacking, many believe that institutional participation in the digital assets market is growing. “As crypto security, technical infrastructure and regulatory clarity have improved over the years, it has opened the door for wider institutional participation in the sector,” Mónica told Cointelegraph, adding:

“In the coming years, we will see a lot of payloads through crypto, including stable currencies and DeFi. I also expect to see more interconnectivity between blockchain-based payrolls with legacies.”

For Fleury, the trend is clear. “Pension funds, hedge funds, sovereign wealth funds and the like will adopt crypto in their portfolio in the next cycle.” They are cautious investors, however, and it takes time to do the necessary diligence.

Related: Cryptographic and pension funds: Like oil and water, or maybe not?

But once institutional investors commit, they tend to speed up their commitments, he added. “We are still in the early innings of this institutional cycle. We will see much more interest from pension funds.”

At that point, a single $ 1-billion cryptocurrency transaction – like the one that took place in late October, setting a record – will be a “daily occurrence,” Fleury said.