Institutional Crypto: Why Do They Keep Buying? (Even Though They "Don’t" Want It)

If you wonder why institutions are buying more crypto, look no further than the old adage: (be) “fearful when others are greedy and greedy when others are fearful.” It’s been true for post-Covid markets, and it seems to be the case for the 2022 crypto winter.

You won’t have to look far to see that there’s more and more institutional money coming to crypto. According to Fidelity and major surveys, most institutions have held or added to their positions. And instead of looking for a sell-price target, many intend to keep buying due to positive three-year projections.

While this may point to a market bottom opportunity, these investors prioritize long-term goals. So price action aside, why are institutions buying more crypto?

Quick Takes:

• Retail investor dominance has halved since 2018 relative to institutional investing. Many more will get involved once crypto overcomes volatility, manipulation, and other objections.
• Many regulators have retraced anti-crypto policies. Countries like India no longer ban crypto, Chinese miners are back to business, and hundreds of governments are creating digital currencies as an official way to include blockchains.
• Almost every major exchange now offers institutional-grade services. The potential upside, economic liberalism, and diversification are appealing enough for institutions to bring billions into crypto.

Are Institutions Buying More Crypto In 2022-2023?

You’d be surprised to know how many institutions are joining blockchain. Some do to keep up with R&D, and others because many of their clients use it. But how relevant is 2022 crypto compared to 2020 or 2018?

Here’s what the recent data shows:

• Fidelity has the most relevant digital asset research including 1,100 investors. Based on surveys, calls, and interviews, 80% intend to add digital assets to their portfolio (52% of which already did), and 70% had a neutral-positive reception. Ironically, the most restrictive countries are Asian, yet none of the 299 investors had negative views of digital assets.
• Coinbase partnered with the Institutional Investor for a 2022 survey of 140 US institutional investors (representing $2.6T). 36% already invested in digital assets, most of which did between 2019 and 2021. Another 63% plans to invest next year. (Note: Many aren’t Coinbase clients. The exchange neither selected nor conducted the survey).

• Bitcoin Treasuries show that 7.8% of all BTC tokens belong to institutions in 2022 vs 6.5% in 2021. Since altcoins trade 50-100 times less than Bitcoin, their ownership rates could be much higher. Exclude Ethereum and the Top 3 stablecoins.
• RapidInnovation conducted another crypto survey of 200 executives from Fortune 500 firms. 94% of them have either bought blockchain services, developed their own solutions, or planned to do so. 
• According to Bridgewater estimates, crypto hedge funds grew from <$5B in 2020 to over $20B in AUM (Assets Under Management). From April 2022, AUM peaked above $80B after the Coinbase IPO and stayed above $20B despite the FTX contagion.

Mind you, the first quote of this post was coined by Warren Buffet, who never supported cryptocurrencies. Yet, Berkshire Hathaway bought a $500M stake at the crypto-friendly digital bank Nubank in the summer of 2022. It’s a Brazilian startup looking to launch its own cryptocurrency this 2023.

2022 might be a dead year for 2021 holders, but not for institutional investing. 

Why Institutions Will Keep Buying Crypto

In hindsight, it makes sense why institutions want to buy crypto. But what can we expect from 2023 and on? Given that these investors are usually long-term thinkers, they would buy for the same reasons they did in 2022:

• Cryptocurrencies are uncorrelated to other assets. We live in unpredictable times both for traditional investments and fiat currencies. While crypto is correlated to some extent, its long-term tendency is the opposite. Diversification is one of its biggest appeals.
• Governments have limited control over blockchain. Crypto can be decentralized, censorship-resistant, and free from government intervention. Along with clear regulations, this benefits institutions with more control over their assets and trades.
• There’s a high upside and relatively low risk. The most popular decision factor is the potential market value. Especially when planning to hold for years, the short-term risk of manipulation almost disappears. Institutions know that crypto can make exponential returns that would take years on traditional markets— or at least offset the dollar devaluation.
• It’s an independent, new digital economy. Crypto volume no longer comes from just trading USD. Revenue comes from DeFi apps, NFT marketplaces, mining tools, airdrops, and other sources. Buying power also increases as more real businesses accept crypto payments, which makes fiat currency unnecessary.
• It’s an effective hedge against dollar devaluation. Short-term, it might seem that cryptocurrencies are more volatile than fiat. Long-term, however, you’ll see coins like Bitcoin gain exponential market value while dollars do the opposite. Also, Bitcoin reaches all-time highs every few years. USD had its last ATH in 1985, is nowhere close today, and will probably never reach it again.

At the time of writing, Bitcoin and Ethereum are 75% below ATHs, and all other coins except altcoins are below 90%. Knowing that blockchain is here to stay, institutions have a low-risk opportunity to accumulate crypto assets. In fact, once they announce big purchases, chances are they bought low months ago.

But not all of them will.

What Stops Institutions From Buying More Crypto?

Buying crypto isn’t always the right move for institutions. It can be a big short-term problem and lock funds out from better opportunities. An infamous example of this is the pro-crypto government of El Salvador.

Shortly before the 2021 ATH, El Salvador’s President made Bitcoin legal tender and bought over 1,000 BTC. Today’s portfolio is around 2,476 BTC with over 67% in losses. Not to say it’s a bad long–term decision but isn’t the best.

Even greater are the losses of Microstrategy, a company run by the Bitcoin maximalist Michael Saylor:

Crypto isn’t that convincing for institutions when you look at numbers like these. Not to mention the many banks invested in blockchain in 2021:

But price volatility isn’t the only concern according to Fidelity’s research:

Before institutional investors buy more crypto, blockchain entrepreneurs have to manage the objections:

• Digital asset custody is unsafe or unreliable. While many lost money in 2021, what really made headlines were the countless crypto platforms going out of business. Clients from BlockFi, Celsius, 3AC, FTX, and others lost everything on custodial wallets, either because of mismanagement or bad liquidity. Attention is now shifting to self-custody wallets like Metamask/Ledger and DeFi apps like LiquidLoans.
• Market manipulation dissuades value investing. In a market barely worth $1 trillion, institutions can’t just buy a lump sum. It would only make it more volatile, also because other big buyers can take advantage of trade news. Many think that crypto whales together manipulate prices, but as we’ve seen, even early buyers like Saylor lose money.
• Crypto laws and regulations are confusing and prone to change. The majority of countries have either implicit bans or neutral regulations around crypto, and unless they have CBDC projects, it may stay that way for years. Regulations can help institutions protect against bad projects but also hinder good ones (e.g., Binance). No institution is 100% crypto-based, and regulations are essential for crypto-fiat on-ramps.
• Cryptocurrencies are too volatile for business. It’s not just the fact that Bitcoin can jump 20% overnight, but the long-term consequences. Some of 2021’s Top cryptocurrencies are no longer around. And one big failure is all it takes to drag down every other project. Neither institutions nor retail investors have yet seen what crypto is like in financial global crises like 2008.

Hopefully, time can solve most of these limitations. Time to increase the market size, set reasonable regulations, stabilize prices, and reveal unknown risks to prevent in the future.

Who Builds Institutional Trading Platforms for Crypto?

Today, there are more crypto platforms offering fiat than fiat exchanges offering crypto. That means institutional investors don’t have as many traditional platforms to join crypto. The only ones that do as for 2023 are Fidelity, Interactive Brokers, and E-Trade by Morgan Stanley.

As for crypto-based exchanges, almost every major option offers institutional services:

• Gemini has the most experience with institutional-grade services. Dozens of companies have worked with them because it has deep liquidity, is US based, and offers the highest security.  compliance level.
• Binance is the most known and also offers institutional products. It boasts over $7T in annual volume and some of the lowest fees in centralized crypto. Institutions not only access different DeFi tools within the platform but also the apps from the BnB blockchain.
• Coinbase has no problems with liquidity with over $100B in assets, 50% being from institutions. Blackrock, Grayscale, and A16Z are part of them. Coinbase became a public company in April 2021, and it’s behind the second biggest stablecoin, USDC (Centre, co-founded by Circle). 
• Kraken is one of the oldest exchanges and is better known for having the best customer support. Even the biggest exchanges have security issues here and there, but Kraken hasn’t since 2011. It trades a daily average of $500M and has similar liquidity to Coinbase, except there are more assets and crypto pairs.

Other centralized exchanges working on institutional solutions are Bitstamp, Bitfinex, and OKX.