Are institutional investors the key silent partners of crypto?

Imagine that an institutional investor, such as an insurance company or pension fund, decides that it wants to test the waters of cryptocurrencies. Or maybe a large corporation is looking to buy Bitcoin (BTC) diversify your treasury. One thing they are unlikely to do is announce their intention beforehand, which could drive the price of the digital asset they are trying to buy up.

Therefore, there is often a lag between the action of a large institution (buying $ 100 million in Bitcoin, let's say) and its public announcement about it. “Institutional participation flows in cycles,” Diogo Mónica, co-founder and president of crypto custodian bank Anchorage Digital, told Cointelegraph. "By the time you find out that a startup is adding crypto, we've usually been talking to them for many months."

Has something like this been happening in the recent price spike, when Bitcoin, Ether (ETH) and many other cryptocurrencies hit all-time highs? Were corporations and institutional investors stealthily gobbling up crypto in the early fall, so as not to surge in price while in the accumulation phase, and its impact manifested itself only this week?

Why the biggest investors?

Kapil Rathi, CEO and co-founder of institutional cryptocurrency exchange CrossTower, told Cointelegraph: "Institutions have definitely been initiating or increasing Bitcoin allocations recently." Much of this could have started in early October, he admitted, as large investors were probably trying to get in before the ProShares exchange-traded fund (ETF) launched, and then became a seller after launch, but even so, "there has been strong passive support that has kept prices stable. This purchase support has been much more like an institutional build-up than a retail purchase in the way it has been executed."

James Butterfill, investment strategist at digital asset investment platform CoinShares, cautioned that his company's data is only anecdotal, "as we can only trust institutional investors to tell us whether they have purchased our ETPs," but "we are seeing a growing number of investments the funds are getting in touch to discuss the possibility of adding Bitcoin and other crypto assets to their portfolios, ”he told Cointelegraph, explaining in more detail:

“Two years ago, the same funds thought that Bitcoin was a crazy idea; a year ago, they wanted to discuss it more; and today, they are more and more anxious to lose clients if they do not invest ”.

The rationale for the investment, Butterfill added, "appears to be diversification and a policy / inflation hedge."

This involvement may not necessarily be from more traditional institutional investors, i.e. pension funds or insurance companies, but leans more towards family offices and funds of funds, according to Lennard Neo, head of research at Stack Funds, "But we see an increase in risk appetite and interest, particularly for specific crypto sectors (NFT, DeFi, etc.) and broader mandates other than Bitcoin." Stack Funds is receiving two to three times more requests from investors than it was receiving at the beginning of the third quarter, he told Cointelegraph.

Because right now?

Why the apparent increase in institutional interest? There are a myriad of reasons ranging from "speculative to hedging against global macroeconomic uncertainties," Neo said. But several have recently stated that they saw that "blockchain and cryptocurrencies would 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 out, or FOMO, at play here, telling Cointelegraph: “Where in the past, investments in cryptocurrencies were a risk to managers - it could go wrong - now it becomes more and more of a risk no allocate at least a portion of the portfolio in crypto, as stakeholders will have examples of other institutions that allocated and benefited greatly. "

The fact that big financial companies like Mastercard and Visa are starting to support crypto on their networks and even purchasing Non-fungible tokens have only stepped up the FOMO, Zwanzger suggested.

"Interest from institutional investors and family offices has gradually increased throughout the year," Vladimir Vishnevskiy, director and co-founder of St. Gotthard Fund Management AG, told Cointelegraph. "The approval of the BTC ETF in October only exacerbated this trend as there is now a much easier way to get this exposure." Inflation concerns are high on the agenda of many institutional investors, "and cryptocurrencies are considered a good hedge for this alongside gold."

Public companies looking for crypto for their balance sheets

And the corporations? Have they bought more Bitcoin and other cryptocurrencies for their corporate treasuries?

Brandon Arvanaghi, CEO of Meow, a firm that enables corporate treasury participation in cryptocurrency markets, told Cointelegraph that he is seeing new receptivity from corporate CFOs to cryptocurrencies, particularly in the wake of the global pandemic. :

“When inflation is 2% and interest rates are reasonable, corporate treasurers don't think about looking for alternative assets. [...] COVID has been around the world and inflationary pressures are causing corporate treasurers to not only be open but actively seek alternative sources of return. "

"From our point of view, we see that more companies buy cryptocurrencies to diversify their corporate treasuries," said Mónica. In addition, “banks are approaching us to meet the demand for these types of services, which indicates a greater trend beyond companies that add crypto to their balance sheet. [...] It means that soon more people will have direct access to cryptocurrencies through the financial instruments they already use. "

Macro trends are encouraging companies to add cryptocurrencies to their balance sheets, Marc Fleury, CEO and co-founder of fintech firm Two Prime, told Cointelegraph. “Consider the fact that corporate liquid cash for publicly traded American 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 additional cash and why this trend will not decrease. "

Meanwhile, the number of publicly traded companies that have announced they have Bitcoin has risen from 14 this time around last year to 39 today, for a total of $ 13.7 billion, Butterfill said.

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

Monica told Cointelegraph: "Fintechs are reaching out to us to help them back not just Bitcoin, but a variety of digital assets, suggesting that, in the broader scheme, large companies are increasingly willing to back crypto payments ".

Fleury, for his part, doubted that cryptocurrencies, with one notable exception, stablecoins, were widely used as a medium of exchange. “Volatile cryptocurrencies like BTC and ETH are not good for payments. Period, ”Fleury said. What makes cryptocurrencies great as a reserve currency makes them a poor bargaining chip, almost by design, he said, adding: "Stablecoins are another story."

Is the stock-to-flow model persuasive?

There has been a lot of talk in the crypto community about the so-called stock-to-flow (S2F) model for predicting Bitcoin prices. In fact, the anonymous institutional investor PlanB's S2F model predicted a BTC price of> $ 98,000 by the end of November. Are institutional investors serious about the stock-to-flow model?

"A lot of institutional investors ask us this question," Butterfill recounted, "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.

Also, the method that compares the existing supply of an asset ("stock") with the amount of new supply that enters the market ("flow"), through mining, for example, "has certainly not worked for other assets. fixed-bid like gold, "Butterfill said, adding:" In more recent years, other approaches have been made to improve the S2F model, but it is losing credibility with customers. "

"I don't think institutions pay too much attention to the stock-to-flow model," Rathi agreed, "although it's hard to smear it, as it has so far proven to be quite accurate." It appears to be more popular with retailers than institutions, he said. Vishnevskiy, on the other hand, wasn't ready to rule out stock-to-flow analysis so fast:

“Our fund looks at this model along with more than 40 other metrics. It is a good model, but it should not be used alone. You have to use it in conjunction with other models and also consider the fundamentals and technical indicators. "

If not the institutions, who is driving prices up?

Given that institutional involvement in the latest phase of crypto appears to be mostly anecdotal at this point, it's worth asking: If corporations and institutional investors haven't been gobbling up most of the floating cryptocurrencies, who is?

"It makes sense that this was a retail-led phenomenon," Butterfill responded, "as we have witnessed the birth of a new asset class, and along with that comes confusion and doubts from regulators." This regulatory uncertainty remains a continuing brake on institutional engagement, he suggested, adding:

“In our most recent survey, corporate restrictions and regulations 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 wealth managers. "

Still, even if staunch data confirmation is lacking, many believe institutional share in the digital asset market is growing. "As crypto security, technical infrastructure and regulatory clarity have improved over the years, it has opened the door to broader institutional participation in the sector," Monica told Cointelegraph, adding:

“In the coming years, we will see many payment methods through cryptocurrencies, including stablecoins and DeFi. I also hope that we will see more interconnectivity between blockchain-based payment rails with legacy ones. "

For Fleury, the trend is clear. "Pension funds, endowments, sovereign wealth funds and the like will adopt crypto in their portfolio in the next cycle." However, they are cautious investors and it takes time to carry out the necessary due diligence.

But once institutional investors commit, they tend to escalate their commitments quickly, he added. “We are still at the beginning of this institutional cycle. We will see much more interest from pension funds. "

At that point, a single billion dollar crypto transaction - like the one that happened in late October, which set a record - it will be a "daily occurrence," Fleury said.