Erik Weijers, a year ago

Institutional money flows into crypto

The inflow of capital from institutions last week was $193 million: the highest amount since December last year. The proportion of institutional capital has grown rapidly in recent years and is roughly comparable to the contribution of retail investors.

What is the explanation for this sudden spike in inflows? One hint is that most of the money came from European institutions. Perhaps the relief that the EU voted against banning Bitcoin proved the trigger. Compared to other crypto assets, about half of the new money flowed into Bitcoin.

The data comes from CoinShares, which tracks weekly institutional capital inflows. Think listed companies, mutual funds, pension funds and sovereign wealth funds.

By the way, Solana (SOL) claimed the number two spot last week in terms of inflows. A record week for this coin, which was even more in demand by institutions than Ether (ETH).

Why the institutions have (finally) come

In 2017, it was still ‘hopium’: the institutions are coming! But in the first quarter of 2018, institutions only accounted for only 20% of crypto investments. Compare that to 64% in the fourth quarter of 2020, a top quarter for institutions.

What is the reason that institutions have really become a factor of importance, compared to four years ago? Hedge funds put 68 billion into crypto projects in 2021. That's roughly 100 times more than in 2017. The crypto venture capital market has also grown tremendously. Compared to 2017, the amount of investment in startups has increased from $1 billion to $11 billion. The largest institutions typically put a percentage of their portfolio into venture capital.

An analyst at Messari lists a few reasons for this increased interest:

  • There is now a professional infrastructure for custody. A sovereign wealth fund simply does not buy and store its crypto on its own hardware wallet or MetaMask. There are now highly esteemed crypto banks and even traditional banks where institutions can deposit billions in crypto.
  • More investment instruments: in 2017, there was no futures market and there were no Bitcoin ETFs. These and similar instruments that professional investors like to deal with are now proliferating. Also, the largest crypto exchanges can handle huge orders without problems.
  • More clarity from regulators. Although there is no finalized legislation yet in both the U.S. and Europe, it is clear that these governments want to embed crypto in the financial system and are certainly not going to declare a blanket ban.

Why is institutional money important?

Institutions also see that the financial reality is changing. The traditional distribution of 60% stocks and 40% bonds no longer yields sufficient returns, even in terms of risk diversification. Institutions are also simply looking at competitors, who are getting better returns by putting a few percent in crypto - without that few percent creating any meaningful extra risk.

What does institutional money mean for the crypto market? First, the additional demand from institutional money is driving the price of crypto higher. Also, it is widely believed in the crypto market that the arrival of institutional money will have a stabilizing effect on prices. A sovereign wealth fund does not ape into a coin and doesn’t panic sell.

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