The idea that traditional finance companies would ever invest in Bitcoin used to sound like a joke until the 2020 – 2021 bull run in the crypto market. That was a period when the BTC price reached its all-time high, followed by numerous altcoins (Ethereum, Binance Coin, Cardano, etc.). Bitcoin has become the only choice for most institutions entering the crypto market. However, buying and holding BTC is not the only way investors act in the crypto landscape. In this article, we are going to discuss institutional crypto involvement, showing the ways they participate in the market.
The Ways Crypto Institutional Investors Participate in the Market
Let’s consider some of the popular ways that companies use to get involved in the crypto industry:
- Direct investments. Some institutions directly purchase and hold cryptocurrencies like Bitcoin and Ethereum as part of their investment portfolios (MicroStrategy, Square, and Tesla poured billions of dollars into Bitcoin in 2021).
- Integration of crypto into payment systems. Companies, especially in the tech and finance sectors, integrate cryptocurrencies into their payment systems, allowing users to buy, sell, and transact with digital assets (PayPal).
- Market making. By partnering with a market-maker trading platform, institutions may provide liquidity to it and receive interest in the form of bid-ask spreads and fees. Market making is crucial in crypto institutional trading, as it provides liquidity for large trades.
- Mining operations. Some institutions participate in crypto mining operations, contributing to transaction validation on blockchain networks and earning rewards in the form of newly created coins.
- ETFs (exchange-traded funds) – an indirect form of investment. Institutional investors use ETFs to gain exposure to a diversified portfolio, providing a convenient and liquid way to invest in various asset classes without directly owning the underlying securities.
- Institutional crypto trading, derivatives: futures and options contracts. This strategy allows to hedge risks and capitalize on market movements without directly holding the underlying assets. Derivatives are available on institutional crypto exchange platforms (Binance, Coinbase, or any other reliable institutional crypto platform).
- DeFi. Participating in decentralized finance allows investors to use such profitable tools as crypto loans and insurance, where all the operations take place in smart contracts, avoiding third parties.
Conclusion
Institutional involvement in the cryptocurrency landscape has evolved beyond mere speculation and direct holdings. The surge in interest during the 2020-2021 bull market prompted traditional finance giants to explore diverse avenues. From direct investments by industry leaders like MicroStrategy and Tesla to the integration of cryptocurrencies into payment systems exemplified by PayPal, institutions are diversifying their strategies. Market making and participation in mining operations showcase a commitment to providing liquidity and validating transactions on blockchain networks. Additionally, the utilization of exchange-traded funds (ETFs) offers a convenient indirect investment route. Notably, institutional crypto trading through derivatives such as futures and options contracts has emerged as a sophisticated strategy, enabling risk mitigation and capitalizing on market dynamics without direct asset ownership. Lastly, the embrace of decentralized finance (DeFi) introduces innovative opportunities like crypto loans and insurance, emphasizing the expanding and dynamic role of institutional investors in the ever-evolving crypto landscape.
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