As institutional investment floods into the crypto space, there are concerns about how this will impact the market. Insiders assess the opportunities to push for widespread adoption while also assessing overall influence.
Over the last year, the cryptocurrency market has exploded. The industry has never been more energized, with bitcoin reaching an all-time high, the NFT boom, and new DeFi innovations. New investors flooded the market in the midst of all of this activity.
In fact, most statistics show that crypto and blockchain investments nearly doubled between 2020 and now. Individual investors have recently poured money into the markets and exchanges. Individual retail investors are driving the August resurgence of digital currencies such as bitcoin, ether, and dogecoin.
This year, however, saw a record number of institutional investments pour into the crypto space. According to a Fidelity Digital Assets survey, 71% of institutional investors intend to invest in digital assets in the future. Furthermore, both large investment firms and entire countries are preparing for a market with increased institutional investment.
Visa, the financial services giant, made a splash in the crypto space this year. While Visa had already begun its crypto ventures, the company’s involvement in 2021 would be through major investments.
Furthermore, Visa announced a plan to assist banks in introducing bitcoin and trading services. In addition, the company recently purchased its first NFT, a CryptoPunks original.
PayPal also made headlines with a slew of crypto-related announcements. Recently, the payments company began offering cryptocurrency trading to its customers in the United Kingdom. In June, it joined Visa in investing in Blockchain Capital’s $300 million fund.
However, there are concerns about the ramifications of this increased interest.
Making cryptocurrency more accessible
The most important takeaway from institutional investment is the increased accessibility it provides to the general public.
Grayscale’s Bitcoin Trust, for example, enables individual investors to speculate on bitcoin without purchasing it directly. When people are still skeptical of cryptocurrency, this makes entry into the market even easier. In other words, they serve as “entry drugs” into the crypto space.
Barney Mannerings, CEO of the Vega Protocol, a decentralized derivatives trading and settlement network, explains how this expansion protects.
“I welcome money and interest from institutions outside of the crypto-native community, such as PayPal. The greater the integration of cryptocurrency and decentralized finance (DeFi) into the “real world,” the better. It makes it more difficult to stifle the technology’s growth and success, or to regulate it into oblivion.”
“PayPal bringing cryptocurrency to its UK users will make this asset class more accessible and can serve as a gateway to experimentation.” Once ordinary users are more comfortable holding cryptocurrencies, they will look into ways to put them to work and generate value through more sophisticated DeFi products, which no traditional financial institutions or consumer finance apps currently offer,” he says.
These additional financial products and services differ from institutions simply holding large amounts of bitcoin.
“The difference now is that, whereas institutions were previously interested in directly holding crypto like BTC, they are now more interested in offering products to differentiate themselves with customers. “Institutions ranging from century-old global investment banks to brand new mobile app startups are contacting us to inquire about sourcing DeFi yields for customers,” says Sidney Powell, CEO and Co-Founder of Maple Finance.
It’s different this time.
There can be no denying the fundamental shifts that occurred in 2020 and 2021. Kevin Tai, CEO and Co-Founder of Linear Finance, explains how this development differs from previous developments that have piqued the interest of the traditional finance sector.
“I believe that this time is different than previous times because there has been a significant shift in the global perception of cryptocurrencies in many countries during a period of economic uncertainty. The explosive growth of bitcoin and ethereum has resulted in widespread retail adoption, and large corporations are now seeing this as a way to maintain their competitive advantage.”
Furthermore, Gunnar Jaerv, COO of First Digital Trust, claims that these major players are no longer sitting on the sidelines in the space. Aside from dormant holdings, they now have active interests.
“They are no longer content to sit on the sidelines; they want to participate in this new asset class.” Though Jaerv expresses some reservations about large-scale investment, he admits that “there may be some challenges in doing so – regulations, a lack of infrastructure, and education.”
The unintended consequences problem
When considering these large investor moves, these positive outcomes receive the lion’s share of attention and importance. Unintended consequences, on the other hand, are a source of concern.
Thesis co-founder Matt Luongo recognizes the impact that institutional interest has had on the price and the crypto community.
“For years, everyone thought we were crazy, and we all want validation,” he says. “However, institutional interest is a poisonous apple. The more tightly institutions embrace crypto, the more likely it is that they will over-regulate, build moats, and try to co-opt what we are doing.”
This kind of hype and fallout was witnessed this year with Elon Musk and Tesla. On the surface, Musk’s rapid rise and fall in interest had an impact on cryptocurrencies.
In addition to concerns about co-opting, Mannerings sees institutional involvement as undermining the fundamental structural changes that crypto is attempting to achieve.
“I am concerned that as more institutions enter the space, resources will be directed toward incorporating tame versions of crypto assets/DeFi protocols into current centralized systems, perpetuating many of the same problems and structural issues that we currently have.”
However, he sees even more room for expansion.
“I’m much more interested in institutions supporting technologies that build fair, secure, decentralized systems that are a genuine alternative to the centralized systems we see today, which is the ultimate promise of technology.”
A delicate balancing act
Institutional support is required to keep cryptocurrencies and blockchain technology in the mainstream.
However, it will almost certainly be a balancing act. As adoption and interest grow, it will be necessary to consider how to best incorporate various interests and motivations.