The volume of the cryptocurrency market clearly indicates the involvement of institutional investors. As crypto has transformed into an asset class from a mere form of speculative investment, institutional investors are no longer shying away from it. But have you ever wondered what the institutional cryptocurrency investment growth drivers are? Jump into this article to learn about the factors that make institutional investors embrace cryptocurrencies.
- Institutional-Grade Infrastructure
Many providers of infrastructure and institutional-grade custody have emerged in the last few years. Starting with custody, these providers aim to close the gap that exists between the traditional system of finance and the ecosystem of digital assets. Financial institutions must find a solution to the problem of asset safety before they can feel confident in providing digital asset services.
The crypto space has introduced several advanced and sophisticated solutions to reinforce the market infrastructure. The solutions range from comprehensive insurance coverage and core transactional technologies to multi-party computation and distribution keys. Even though the underpinnings of institutional-grade infrastructure haven’t fully matured, they are enough to be one of the reasons for investing in crypto .
- Heightened Regulatory Clarity
Regulators have always struggled to find relevant frameworks because of the diverse nature of digital assets. Cryptocurrencies often display attributes overlapping different asset classes. It culminated in a lack of clarity in a few jurisdictions and prevented institutional investors from embracing crypto assets.
But regulators are now offering adequate clarity required for the institutional adoption of cryptocurrencies. For instance, Asian countries like Singapore have offered regulatory consent to virtual asset service providers. In Europe, Switzerland has introduced comprehensive laws on distributed ledger technologies.
On the other hand, some countries like China are also putting a clear ban on all types of cryptocurrency transactions. In the US, multiple regulators are responsible for looking after the different aspects of cryptocurrencies. But the regulatory framework has become much more detailed to help investors get involved in the digital assets industry with ease.
This specific set of rules and regulations is one of the reasons why institutions now adopting cryptocurrencies. Digital assets will now be able to thrive better in the market with a clear regulatory framework in the mix.
- The Need for Diversification and Hedging
Institutional investors are realizing the importance of portfolio diversification to eliminate risk. Institutional investors can augment their asset portfolio diversification by incorporating cryptocurrencies. In the case of a market downturn, cryptocurrencies are excellent for compensating losses related to other asset types.
- Evolving Demands
Institutional investors are looking forward to finding ways to fulfill the evolving demands of their clients. The interest and demand surrounding crypto investments are surfacing from institutional clients and high-net-worth individuals. In this scenario, institutional investors have no choice but to incorporate crypto assets to cater to the ongoing preferences.
- Growth of the DeFi Ecosystem
One major reason behind the institutional crypto investment mainstream adoption is the growth of the DeFi space. The peer-to-peer decentralized ecosystem has been highly innovative since the initial days. The entire financial system is being reconstructed with greater interoperability, transparency, and security as decentralization has taken center stage.
The financial products, as well as infrastructure in DeFi, have advanced significantly to offer increased access to institutional finance. For instance, the DeFi space was dominated by permissioned applications with KYC requirements and smooth on-chain asset management tools. Additionally, scalability issues in the DeFi space can be solved with the help of layer 1 and layer 2 solutions.
- Long-Term Investment Potential
If you are wondering what’s driving institutional investments in crypto, the longevity of the assets should be a consideration. Institutional investors are slowly realizing that crypto assets can be truly transformative in the long term. Crypto assets can be easily used as a hedge against traditional financial systems. Therefore, cryptocurrencies can be a tool for disruption and innovation in a multitude of sectors.
- Competitive Pressure
With institutional peers entering into the crypto space, no one wants to be left behind. Institutional investors are following peers and diving into the crypto market with the hope of making steady profits. So, one driving factor behind institutional investors adopting cryptocurrencies can be the fear of falling behind in the digital currency landscape.
- Market Stability
The cryptocurrency landscape is becoming more stable with increasing age and maturity. With increased price stability, investors can also enjoy greater stability. Therefore, institutional investors are entering the cryptocurrency market to execute larger trades and take advantage of the minimal price fluctuations.
The adoption of crypto assets by institutional investors faced myriad challenges over the years. But with improvements in the crypto space, institution adoption of crypto assets has become more mainstream. Institutional investors are also developing a better and deeper understanding of crypto assets and serving as a harbinger of change in the crypto ecosystem.