The state of the world economy has led institutional investors to look for alternative investment methods. Bitcoin (BTC) is becoming such a tool with increasing frequency.
As of August, business intelligence company MicroStrategy bought BTC for a total of $ 425 million. At the same time, digital asset manager Grayscale Investments raised record amounts in both the first and second quarters of this year (totaling $ 1.4 billion).
But should we celebrate institutional investors as “saviors” of cryptocurrencies? Or is it the other way around who will lead to the decline of the digital asset industry?
Related: Why Are Institutions Suddenly Interested In Bitcoin?
Safe assets are in a global crisis
Before answering the above questions, let’s look at the main reason institutions look at cryptocurrencies. There is a global crisis when it comes to generating returns on safe assets in the traditional market. Low risk instruments like savings accounts and high quality bonds like the US Treasury Department have had minimal returns in recent years. The returns on these assets are so low that inflation often devours profits, leaving investors with negative investment returns.
Some nations like Denmark, Switzerland, and Japan use negative interest rates to stimulate the economy. While it’s a great way to fight deflation, low and negative interest rates keep people from investing in safe assets. However, this does not mean that traditional instruments will fail investors. On the contrary, we are at a stage in the development of the global economy when low-risk investments are still not offering investors adequate returns.
However, this will increase interest in cryptocurrencies until the global economy enters a phase where traditional assets are doing well again. Compared to the general market, the digital assets industry has developed much faster for several reasons for this phenomenon. Government control around the market is limited, and crypto projects have a different mindset. In addition, the current level of technology enables and encourages space companies to innovate.
As a result, cryptocurrencies have grown into a mature industry that has historically produced excellent returns for investors. Even amid a global economic crisis, Bitcoin’s volatility is at record levels. And the less volatile an asset, the lower the risks for investors.
While the above makes cryptocurrencies attractive to individuals, today’s digital asset market offers institutional investors a way to meet their investors’ return-on-investment expectations. The stakes are high and they are checking Bitcoin for a very good reason.
The impact of the recent institutional surge in cryptocurrencies
People in the crypto ecosystem often think that institutional investors will be the main drivers for the next Bitcoin boom. However, this is not exactly the case here. And the opposite – that institutions will corrupt the crypto market with their whale-sized investments – is also not true.
Instead of “destroying” the crypto market or launching Bitcoin “to the moon”, institutional investors are helping the crypto market to mature and make it more efficient. For example, when BTC is undervalued, they take advantage of that inefficiency to increase it, and they decrease it when the digital asset is overvalued.
Because institutional investors are seasoned investors with extensive experience in the money market, they follow the above practices to limit their risks and maximize their returns. This dampens volatility and increases market liquidity. However, factors such as Bitcoin’s acceptance rate and the current macroeconomic situation have a greater long-term impact on the underlying movement in BTC price than institutional investors.
On the other hand, a more mature market also means that the potential returns on crypto investments will also decline. However, this will not lead to the demise of the digital asset industry. Rather, it is a sign of the natural evolution that all new markets are going through as they enter the mass adoption phase, resulting in a more mature, stable and less volatile crypto sector.
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However, taking strong positions in cryptocurrencies, as was recently the case with MicroStrategy, is a buy-signal for other institutional investors who will view cryptocurrencies as a serious asset class. It’s important to note that MicroStrategy’s case with Bitcoin is of great significance considering that the company is a company listed on the Nasdaq stock exchange.
Therefore, strict financial diligence requirements apply to its shareholders. By acquiring significant amounts of BTC, MicroStrategy firmly believes that this move will not have an adverse effect on its share price or corporate social responsibility.
If a private company – no matter how big it was – had taken the same position in cryptocurrencies, it wouldn’t be as big news as MicroStrategy.
With institutional investors, cryptocurrencies look forward to a better future
In 2017, we didn’t have many institutional investors in the crypto market. Given the great fear of being left out, the hype and fraud, and the multitude of cyber threats, speculation has been the main driving force behind the ICO craze and extreme bull market.
With effective regulation in multiple countries and institutional investors making the market more effective, cryptocurrencies are more mature than ever. Less risk and good returns make Bitcoin an attractive alternative investment for institutions. And now they are coming into the industry in great numbers.
This article does not contain any investment recommendations or recommendations. Every step of trading and investing involves risk and readers should conduct their own research in making their decision.
The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.