For many years, it was absurd to think that traditional financial institutions would buy bitcoin (BTC). However, the institutional presence in the cryptocurrency became a reality as of mid-2020. Many attribute the most recent bull run, which started in late 2020 and ended in late 2021, in part to “the suits’” entry into the cryptocurrency market.
Current cryptocurrency investors are excited by institutional interest in the market because institutions bring in new capital, almost always more than retail investors can.
For many organizations that entered the cryptocurrency market, Bitcoin—the largest cryptocurrency by market cap—acted as their entry point and destination. As of June 2022, institutions, a broad category that includes ETFs like VanEck in Canada and sovereign governments like El Salvador, possessed 6.47 percent of all bitcoin that will ever exist.
Although significant institutions frequently start with bitcoin and end with it, experimental institutions have recently entered other areas of the cryptocurrency sector. Instead, then just investing passively in a cryptocurrency like bitcoin, institutions are actively investing in two interconnected sectors: NFTs and the metaverse.
DeFi
A portion of the cryptocurrency market called decentralized finance has billions of dollars in smart contract-based investments. Self-executing pieces of code known as smart contracts are used to enforce contracts between parties. Decentralized apps (dApps), which run on smart contracts and provide a variety of financial services like loans, insurance, etc.
DeFi may appear to be the antithesis of traditional banking on the surface, but the two fields really share interests, and there have recently been some creative partnerships.
Institutional investors are actively sought after by some DeFi platforms. In June 2021, DeFi lending protocol Compound established a corporate gateway called Compound Treasury. Compound Treasury received a B- grade from S&P Global Ratings, a credit rating organization for traditional financial institutions. This rating indicates that the USDC-powered yield platform is “speculative” but “currently has the capacity to meet financial commitments.”
Bitcoin
Holding cryptocurrency on their balance sheets is the easiest approach for institutions to invest in cryptocurrencies.
In August 2020, the company MicroStrategy, run by Bitcoin maximalist Michael Saylor, invested $250 million in bitcoin. A month later, it invested another $175 million in the digital currency. Following the significant move made by MicroStrategy, $50 million BTC was spent by payment processor Square in October 2021, and $1.5 billion BTC was spent by EV maker Tesla in February 2021.
The biggest holder is still the one who moved first. In its holdings, MicroStrategy has 129,218 BTC, or 0.615 percent of the 21 million total bitcoin that will ever exist. With 42,902 BTC, or 0.204 percent of the total Bitcoin supply, Tesla finishes in second.
Institutional involvement in the cryptosphere has pros and cons. After less than two months of experimenting with accepting payments in bitcoin for its automobiles, Tesla decided in May 2021 to change its mind and stop doing so due to environmental concerns. The cryptocurrency market experienced a significant sell-off because of this about-face.
Another set of organizations holding the most cryptocurrency is bitcoin mining firms or groups, which are compensated with bitcoins for confirming network transactions.
Institutions can also invest in bitcoin in indirect ways. ETFs, or exchange-traded funds, are the most popular type of indirect investment. Although Canada and Europe have bitcoin spot ETFs, the financial product is not permitted in the US. The Grayscale Bitcoin Trust, a closed-end trust that monitors the value of Bitcoin, is one example of an ETF-like product. (The trust is managed by Grayscale Investments, a division of Digital Currency Group, which also owns CoinDesk.) As of June 2022, it had assets under management (AUM) totaling $18.5 billion.
A different option to bitcoin spot ETFs is bitcoin futures ETFs, which invest in bitcoin futures contracts. The SEC approved the ProShares Bitcoin Strategy ETF (BITO) and several others in late 2021, driving the price to all-time highs.
Another new development is the use of bitcoin in retirement plans. Fidelity Investments, the biggest 401(k) provider in the US, started allowing access to Bitcoin through its 401(k) plans in April 2022. Americans could use their retirement savings to buy cryptocurrencies if their employers allow it.
The metaverse and NFTs
Some businesses have bypassed the customary bitcoin-first strategy and jumped right into non-fungible tokens (NFTs), or digital assets that are primarily stored on the Ethereum blockchain.
Some businesses have made investments in cryptocurrency domain names, particularly in the NFTs known as the Ethereum Name Service (ENS). Beer maker Budweiser created an NFT line in addition to purchasing beer.eth for 30 ETH. Other food and beverage firms entered NFTs after Budweiser. For instance, Taco Bell (YUM) sold tokens to earn money for several uses. Bored Ape NFT was purchased by Arizona Iced Tea and placed on its can. The metaverse, a frequently unclear word that describes a digital environment where people interact with one another through avatars, is closely related to NFTs. Multinational firms have increased their marketing and strategic efforts in the metaverse ever after Facebook changed its branding to Meta in October 2021.
Although CEO Mark Zuckerberg’s concept of the “metaverse” primarily involves virtual reality-enabled offices called “infinity offices” and isn’t necessarily based on a public blockchain, for the cryptocurrency industry the metaverse revolves around virtual land and gaming environments like The Sandbox and Decentraland.
Barbados established an embassy in Decentraland in November 2021, and the Warner Music Group (WMG) launched plans for a music theme park in The Sandbox in January 2022. Additionally, HSBC purchased a piece of property in The Sandbox with the intention of “engaging with sports, e-sports, and gaming aficionados” in the future.
In the metaverse, a virtual environment where avatars communicate with one another, these avatars undoubtedly require some digital attire. For an undisclosed sum in December 2021, footwear behemoth Nike (NKE) purchased fashion start-up RTFKT and NFT collectibles. RTFKT creates digital footwear.
Even while shopping centers are being constructed in the metaverse, widespread acceptance is still years away. According to Cathy Hackl, a.k.a. the Godmother of the Metaverse, who spoke to CoinDesk in December 2021, “I don’t think anyone can assign a time or date, but I will say that this decade is a decade of constructing and pioneering.”