Bitcoin is no longer the taboo it used to be in the mainstream finance world. Many respectable financial organizations and individuals are openly exploring Bitcoin, and it’s the underlying technology, as a serious investment.
But, the flood gates still haven’t opened and the big money isn’t flowing into the crypto market. So, what exactly are these institutional investors doing right now to prepare to enter into the Bitcoin and crypto market?
The Big Money Holy Trinity
For fast, large scale adoption of Bitcoin, three key parts need to come into play:
- Retail adoption of blockchain
- Government regulation and approval
- Institutional investment
The three parts all play off of each other. Retail adoption is difficult without major financial players pouring their resources into the system and regulatory clarity. Regulators are unlikely to make concrete decisions about cryptocurrency until they can see how users and investors plan on actually using the technology. And finally, big investors are hesitant to make big bets until it’s clear how blockchain networks will be used by retailers, and what the financial rules are going to be. It’s a bit of a catch 22.
That’s why most institutional investors are biding their time waiting for retail adoption to grow and for regulators to get more clear on what the rules will be for cryptocurrencies around the world. But, there are other things that organizations are doing in the meantime.
Keeping an Eye on the Market
Institutional investors still aren’t throwing their cash at Bitcoin, but they are keeping a close eye on the market. Banks that once shunned Bitcoin as a crazy experiment that would end in disaster, are now releasing official reports on Bitcoin performance.
A clear example is with J.P. Morgan Chase. CEO Jamie Dimon once called Bitcoin a scam. In 2019, the bank released a report stating that their analysts believe Bitcoin has intrinsic value. This is a huge development from the mainstream financial world and demonstrates how sentiment is rapidly changing for the big banks.
Many other large financial institutions are also on a mission to hire blockchain specialists to feel out the new markets and technologies. Bank of America and Citi also have advertised big openings for experts in finance technology and blockchain. They are making sure that they are well informed and prepared for any changes the industry is going to go through in the next 10 years. The internet shook up the retail industry over the last 20 years, leaving behind anyone that failed to strategize. Banks can now see that blockchain is doing the same for finance, and they don’t want to get left behind.
But J.P. Morgan and other banks aren’t just hiring analysts and releasing statements on Bitcoin. They’ve also been investing heavily in their own blockchain projects.
Investing in Blockchain Projects
While institutional investors are often shying away from buying Bitcoin and cryptocurrency directly, many are investing in blockchain in other ways.
Banks around the world are finding ways to use blockchain technology to streamline their operations. From identity verification to international transaction settlement, they are experimenting with new ways to do what they do.
J.P. Morgan has even released its own cryptocurrency, JPM Coin. It’s a token designed to make financial settlements faster and cheaper for their clients. However, their private token is very different from Bitcoin and other decentralized currencies. Only approved institutional clients can actually use JPM coin.
This is important because it means that banks and other Institutional investors are getting the first-hand experience in blockchain and cryptocurrency, albeit on their own terms.
Figuring Out Where Cryptocurrency Fits Into a Balanced Portfolio
Institutional investors are the “smart money” in the finance world. They are often large organizations such as hedge funds, that manage huge funds and have been in the game for a long time. They are not going to make any uncalculated bets.
Many investors still don’t know where Bitcoin fits into a balanced investment portfolio. Does it count as a technological investment? Or a high-risk asset? What about altcoins? Is it even legal?
These are the questions that big fund managers need answering. So, most of them still have Bitcoin in the “very high risk” basket of investments.
What investors need to figure out is what is going to affect the Bitcoin and cryptocurrency price in the future, and how other assets are correlated with cryptocurrency. Once it’s established what market moves affect the price, they can figure out how to increase their exposure to cryptocurrency that makes sense for their unique investment portfolios.
Experimenting With Investment Vehicles
Perhaps the main thing that held back institutional investors from cryptocurrency has been the lack of financial infrastructure for them to do so. Hedge Funds and investment banks often don’t want to invest in assets directly. They would rather buy a financial product that’s tied to that investment.
For example, most investors never actually buy gold. Instead, they buy Gold Exchange-Traded Funds or EFTs. These are investments that are financially backed by gold, but when you buy into a gold ETF, you never actually buy or own any physical gold. Most institutional investors would never dream of buying actual Bitcoin on an exchange and storing it themselves.
Now, these investment vehicles are being developed for Bitcoin. Bakkt is one of the first major platforms aimed at making Bitcoin investment more accessible to institutional investors. It launched this year and has begun attracting larger investors to the crypto space.
As more of these investment vehicles are developed and refined, institutional investors will have more options and confidence when choosing to up their exposure to Bitcoin.
The Big Money is Gearing Up
It’s been long debated when the Bitcoin price will shoot up to the moon. One of the key factors holding it back has been the hesitance of institutional investors.
Now, the pieces are falling into place as the large financial institutions up their awareness, experimentation, and investment in the world’s most exciting currency. Soon, the money could start pouring in.