For many years, the very idea of investing in cryptocurrencies by traditional financial institutions seemed impossible. Over time, the status of crypto assets in the traditional financial sector has strengthened, and by the middle of 2020, investments in cryptocurrencies have become more popular.
Let’s find out why institutions invest in cryptocurrencies and how this affects the prices.
How do large institutions and companies invest in cryptocurrencies?
At the moment, the interest of large investors in cryptocurrency is limited to Bitcoin. However, some of these organizations do not mind taking risks and entering completely different areas of the crypto world. For example, DeFi, NFT, the metaverse, etc. Let’s analyze some of them, to make it easier to decide which crypto to buy.
The easiest way for institutions to invest in cryptocurrencies is to purchase and hold them on their balance sheet. As you might have guessed, the largest investments are made in BTC. The first major move by institutional investors was the purchase of $250 million worth of BTC by MicroStrategy in August 2020, and another $175 million a month later.
In total, MicroStrategy owns 129,699 BTC, and its CEO Michael Saylor says they will continue investing in BTC. At the end of July 2022 the company bought another 480 BTC.
Following MicroStrategy, Square also made an investment in BTC in the amount of $50 million. Another example of a major investment is the world-famous car manufacturer Tesla. They bought $1.5 billion worth of BTC in early 2021.
The country of El Salvador is also in the list of unusual investors. Their government has made BTC the official currency of the country and currently owns about 2300 BTC.
It is worth noting that mining companies that receive rewards in BTC for verifying transactions on the network have formed their own category of top cryptocurrency holders. In addition to direct investments, organizations also practice indirect methods. The most popular form of indirect investment is exchange-traded funds, or ETFs.
NFTs and the metaverse
Some brands decided not to think about the cryptocurrency to invest in and focused on an even newer phenomena: NFTs and assets based on the Ethereum blockchain. In particular, companies have been using services like the Ethereum Name Service (ENS) and investing in crypto domain names that are sold as NFTs.
For example, beer maker Budweiser decided it was time to invest 30 ETH to buy Beer.eth beer and launch a collection of NFTs. The list of food manufacturers interested in NFTs does not end there. In particular, Taco Bell (YUM) sold tokens to raise funds for various purposes. Nike has also embraced a new branch of business by acquiring NFT collectibles and fashion startup RTFKT.
The concept of metaverse is closely related to NFT and means a digital space in which users interact with each other through avatars. Investment in metaspace has increased since Facebook’s rebranding to Meta in October 2021.
Despite the fact that the idea of the Meta universe is somewhat far from blockchain technology. The crypto industry is quite closely connected with the meta universe. Basically, everything revolves around virtual lands and game environments like The Sandbox and Decentraland.
In January 2022, the plans of music theme park at The Sandbox were announced. They also bought a plot of land in The Sandbox acquired by HSBC with plans to interact with fans of e-sports and sports.
Some institutional investors are also interested in the DeFi (decentralized finance) part of the crypto industry, where billions of dollars are blocked in smart contracts. DeFi works on smart contracts that support decentralized applications (dApps). In turn, dApps offer financial services for lending, insurance, and interest-bearing accounts.
Of course, DeFi platforms are interested in attracting institutional investors. For example, the Compound Treasury DeFi Lending Protocol created the Compound Treasury Institutional Gateway in June 2021, which received a B- rating from S&P Global Ratings, a rating agency for traditional financial institutions.
At the same time, some institutions are moving directly to DeFi protocols. In 2021, the French investment bank Société Générale (SocGen) submitted an application on the MakerDAO governance forum to accept its digital collateralized bonds, OFH tokens, as a lending platform. These tokens were issued by the bank as collateral for a $42 million loan in the DAI stablecoin.
DeFi is also being explored by central banks. In the spring of 2022, the Central Bank of Singapore, together with DBS Bank, JPMorgan and Marketnode, launched Project Guardian, designed to explore options for using digital assets in tokenization and decentralized finance (DeFi).
How do investors influence the price of crypto?
The cryptocurrency market is distinguished by its volatility (susceptibility to changes due to any events). Of course, the direct participation of institutional investors affects the prices of cryptocurrencies (BTC, ETH and all the rest). All this worries the crypto community, since the big players in the traditional financial market own much larger amounts of money compared to private investors.
Some people even link the Bullish trend of 2020-2021 with the first time institutional investors got involved with crypto. The emergence of large players has increased public interest and faith in cryptocurrencies and contributed to the uptrend in prices of cryptocurrencies. For example, Tesla bought $1.5 billion of BTC, which led to a 50% increase in the price of BTC.
At the same time, it is important to remember that the impact can be negative. The result of Tesla’s decision to cancel the acceptance of payments in BTC caused a decline in the cryptocurrency market. A similar reaction was caused by Tesla’s decision to sell 75% of its BTC
As you can see, the interest of institutional investors in cryptocurrency is growing every day. Thus, not only private investors, but also large organizations begin to believe in the prospects of cryptocurrencies.
At the same time, major players influence the market in their own way. That is why it is important not to forget to keep abreast and carefully analyze the current situation before making any decisions.