Why the Next Crypto Bull Run Will Be Different
Institutional investors are transforming crypto markets, not only in-depth and liquidity but in driving financial product innovation that is accessible and more sustainable. As institutional activity in digital assets gains traction, the crypto markets will likely benefit from increased growth and innovation –– where institutions go, mass adoption will follow.
Some may hesitate before exclaiming optimism over recently rising crypto markets. We’ve certainly seen these highs before, short-lived by a market crash and prolonged ‘crypto winter’. However, as the industry begins to defrost ahead of what people are coining the ‘crypto spring’ (Bitcoin has risen at least 120% since the start of the year), lessons have been learned and the industry is in a very different place to where it was amid the hype of 2021.
While NFTs, memes, and celebrity endorsements were responsible for skyrocketing values in the past, this rally is being driven by something much more mature: meaningful thought through regulation, institutional liquidity, and financial product innovation, for example in the form of a spot Bitcoin ETF.
The Proof is in the Pudding
Institutional interest in digital assets has been gradually building, culminating in a dramatic increase in investments over the past few months causing some to reference a ‘crypto renaissance’. During the final week of October, institutions poured just under $326 million into digital asset investment products –– mostly into Bitcoin. Furthermore, within the past two months, Bitcoin institutional investment vehicles witnessed more than $1 billion in new inflows.
Meanwhile, a research report by K33 noted that the recent surge in institutional interest lies especially in exchange-traded products, like SEBAX –– AMINA Bank’s Crypto Asset Select Index that diversifies exposure to reduce risk. K33 deduced that this investment pattern was indicative of a more considered investment approach, a tactic that typically precedes long liquidations, as opposed to the outright optimism performed during previous crypto bull runs.
In addition to an obvious global trend, increased institutional investment is also strongly evident in regional crypto markets. For example, in the UAE more than nearly 70% of digital asset transactions from the past year (as of June) were comprised of institutional investments. This reflects the portfolio interests of not only organizations but also high-net-worth individuals, who are highly concentrated in the jurisdiction. Meanwhile, the volume of institutional investment in APAC is so large — a greater population requires a greater number of institutions — some are proclaiming the next bull run will be spearheaded by either Asia or the UAE.
No Time Like the Present
Now that regulation is being driven as a priority, market conditions are beginning to reach the standard institutions have come to expect. Over the past year, crypto hubs across the globe have begun defining and enforcing their own regulatory frameworks but it is only the first step.
Importantly, institutional investors to remain active in the market relies on the pro-active regulation that is coming into force in key markets. MiCA in Europe, the UK’s FCA marketing guidelines, and digital asset regulatory frameworks from the SFC and FSRA in Hong Kong and Abu Dhabi respectively, provide institutional investors with the reassurances and ground rules they need to operate at a sustainable level. These crypto regulatory frameworks ultimately better inform and provide the regulatory clarity that institutional investors require to efficiently operate.
The industry is still analysing which use cases of digital assets and blockchain technology resonate –– financial instruments, and which ones don’t –– the metaverse. Spot crypto ETFs are rifling enthusiasm amongst institutional investors as the world’s leading asset managers including Blackrock, Grayscale, VanEck, and Invesco, have all submitted spot crypto ETFs for approval by the SEC.
Reputation is important, so when institutional investors observe these leading financial players access the market, they begin to take action. The growing trajectory of institutional investment coincides with the encroaching timeline of the ETF approvals and industry experts predict receiving the green light will only further catalyse participation in the market from institutions. A Bernstein research report calculates that, if approved, ETFs may account for 10% of Bitcoin market value three years from now.
Another blockchain project attracting institutional investment is the tokenisation of financial assets, essentially applying the new digital economy to traditional markets. Real-world tokenization is already reshaping mainstream asset classes from US treasuries to equities to real estate. As reported by CoinDesk, Traditional banks … love things like instant settlement (which you get with RWAs), 24/7 trading, lower costs, and the transformation of illiquid assets into liquid instruments,” which is what we get with NFTs.”
The Impact of Institutionalisation
The institutionalization of the crypto industry is upon us, which has a significant impact on the underlying ethos of what some intended to be the original ethos of the crypto economy. We are already beginning to witness the effect of increased institutional investment –– for example, in early November, CME Group overtook Binance as the world’s largest Bitcoin futures market. A likely contributing factor to this ‘flippening’ is that institutions are much more like to trade on CME exchanges and so we see traditional finance playing a key role in the sustained future of crypto.
Similarly, global investment banks are responding to demand from institutional clients to introduce crypto trading. A stream of traditional custodians have announced digital asset services; among the most recent, UBS now allows clients in Hong Kong to trade crypto-linked ETFs, and Santander’s private bank has introduced BTC and ETH trading for its Swiss clients. In a symbiotic relationship, institutional investors trust the legacy of traditional finance and traditional finance relies on the liquidity of institutional investors.
If greater institutional investment will drive the next crypto bull run, as this piece has argued is likely, it can be deemed as a positive contribution to the bolstering of the crypto industry. However, if this coincides with traditional financial players entering the space and replicating the same hierarchies as before, then the purpose of digital assets is lost. The digital economy must be the convergence of old and new; historical economic stakeholders embracing cryptocurrencies and the innovative financial values they signify.
As any economist can tell you, financial markets are cyclical and crypto is certainly no exception. Institutions are transforming crypto markets, not only in depth of value but most significantly in providing momentum that is sustainable. As institutional activity continues to increase, the crypto markets will likely benefit from increased growth and innovation –– where institutions go, mass adoption will follow.
About the Author
Authored by Franz Bergmueller, Group CEO, AMINA Bank