While traditional finance, which includes banking, investment, and insurance, has been around for at least a century, the digital currency market is relatively younger. Bitcoin, the first ever cryptocurrency, was released in January 2009 and did not gain much traction outside enthusiast communities until a couple years later. Over the past few years, however, applications of the technology have proliferated, with major technology companies such as IBM and Microsoft exploring its use cases to augment or replace existing financial processes.
According to data from CoinMarketCap, the cumulative market capitalization of the crypto asset class is approaching $275 billion. A significant portion of this valuation comes from the crypto market’s potential to be used as a hedge against the prevailing economic system. Countries like Venezuela that are currently grappling with long-standing economic turmoil and inflation are a prime example of this.
Citizens of Venezuela and Zimbabwe have overwhelmingly turned to digital assets because their local fiat currencies depreciate significantly every minute. While Zimbabweans used foreign currencies, including the US dollar, in the past, their physical availability in the country has always been an issue.
Bitcoin, and other such cryptocurrencies, do not face this problem as they are truly global and accessible over the Internet. Anyone can create a Bitcoin wallet and transact with other users on the network, regardless of borders and geopolitical restrictions.
This unprecedented free movement of value has many benefits for banks and traditional financial institutions as well, since the underlying blockchain technology can be leveraged to make cross-border transactions more inexpensive and efficient.
Rising General and Institutional Acceptance
Noticing blockchain’s immense potential, institutional investors have started to take note of specific digital assets and the general industry. Cryptocurrency exchanges, which offer the easiest way for investors to purchase digital assets using fiat currencies, have also reported that institutional involvement in the market has been on the rise.
In a blog post published May 2018, American cryptocurrency exchange Coinbase said,
“In the past few months, over 100 hedge funds were created that exclusively invest in and trade cryptocurrency. Some of the world’s largest financial institutions have also recently announced their plans to begin trading cryptocurrency.”
Coinbase has been at the forefront of introducing new cryptocurrency products geared towards non-consumer and institutional audiences, including custodial services such as Coinbase Custody and professional-grade trading tools in the form of Coinbase Prime. Simultaneously, other exchanges have also been attempting to innovate and attract more institutional wealth to the market. Gemini, an exchange owned by the Winklevoss twins, is attempting to introduce the first ever Bitcoin ETF (Exchange Traded Fund), pending approval from the United States Securities and Exchange Commission (SEC).
Outside the US, countries like Japan and South Korea are pioneering cryptocurrency adoption by passing legislation that either recognizes digital assets as legal tender or providing a regulatory framework for blockchain and cryptocurrency businesses and startups to follow.
Institutions Prefer Longer Investment Horizons
As with traditional stock markets, institutional investment tends to stick around for longer than a few months. While consumers and retail investors might liquidate their holdings for emergencies or during periods of volatility, hedge fund managers and institutional investors tend to hold a more long-term position. It is likely as a result of this persistent demand that cryptocurrency prices have been trending upwards lately.
Anthony Pompliano, co-founder of crypto hedge fund firm, Morgan Creek Digital, explained why institutional traders are increasingly starting to venture into the cryptocurrency space. In an interview with Cointelegraph in July 2019, he said,
“I would make the argument that having 100% exposure to fiat currencies is a really bad idea. Right? Because if one of those fiat currencies that you have 100% of your wealth in either hyperinflates or fails, you’ve got a lot of problems.”
During an appearance on CNBC’s ‘Crypto Trader’ segment, Pompliano gave the world a glimpse at how hedge fund managers are approaching the crypto market. He said,
“Around $3,800, in March of this year, we put an investment on Bitcoin for public pensions and obviously that investment is doing really well. We have a price target as to when we think that the longer term horizon is and what I came out and said was $100,000 by December of 2021. I think we’re generally headed to higher highs and I thought it was important to put that on the public record.”
Retail Adoption is on the Rise Too
While institutional demand has undoubtedly increased, global consumer adoption of cryptocurrencies has been steadily climbing as well. This is best exemplified by the fact that major tech companies, including Samsung and HTC, have integrated digital asset wallets within their consumer electronics devices. Samsung’s Galaxy S10 lineup of smartphones, for instance, comes with a ‘Blockchain Wallet’ on-board that is also compatible with several ERC-20 tokens and decentralized applications (DApps). The universal availability of crypto wallets within every single smartphone has the potential to make retail payments using crypto much more accessible.
Similarly, DApps like Alluva are boosting adoption by offering everyone the ability to earn rewards for predicting future prices of cryptocurrencies. Unlike trading, where users have to invest in the tokens directly and have expertise dealing with minute fluctuations, Alluva allows users to predict at absolutely zero risk. Users that make accurate predictions are rewarded in the form of Alluva tokens (ALV). These tokens can either be exchanged for other cryptocurrencies on a supported exchange (provided you are legally permitted to do so in your region), or exchanged for products and services at Alluva’s range of upcoming partners and online store.
While many believe that traditional finance and the banking system are distancing themselves from the cryptocurrency market, the facts tell us a different story. With institutional interest and investment on the rise, we may truly witness the golden age of the crypto and blockchain sectors soon enough.