If you can’t beat them, join them. This seems to be how financial institutions are handling crypto. Executives at large financial firms have repeatedly echoed the same thing, that crypto poses no threat to their business. But there is a sense in Wall Street that crypto and other financial services (payment gateways) could end up disrupting traditional banking. Rather than fighting crypto, now it seems that financial institutions like hedge funds want a piece of the pie. Some analysts are attributing the recent rise of price experienced by crypto to capital inflow from institutional investors.
More capital, higher price
Bitcoin has surged more than three times from $3,800 at the start of the year to above $13,000. This, when compared to other investments like the stock market, is unheard of. While the S&P index and gold rallied this year, nothing can be compared to the rise that was experienced by crypto, and many in the industry think that this is mainly due to institutional investors largely driven by the upcoming regulatory scrutiny crypto is going to face in the coming months. While it might seem like regulations are bad for crypto, for institutional investors, this is exactly what the are looking for as this will make their investments safer. In fact, many within the crypto industry were asking for more regulations just to attract institutional investors. Jamie Farquhar of the blockchain advisory group, NKB Group remarked that “Macro managers and high net worth individuals are generally, in my experience, focused almost entirely on Bitcoin”.
There are other factors that played into the rally experienced by Bitcoin, especially in the second quarter. During the first quarter of 2019, the Bitcoin market was struggling to break out of short term resistance, but the second quarter saw Bitcoin breaking short term resistance sometimes within days. The Chinese, fearing a trade war could affect their economy, dumped their fiat holdings in Yuan for bitcoin. China always had a huge impact on bitcoin prices. The trade war combined with the fear of a recession has pushed many investors away from traditional assets like bonds and into crypto, making many see bitcoin as digital gold. Whenever the global economy slows down the price of gold goes up, similarly, Bitcoin also goes up when other assets are facing stress. In some sense, the weakening of the dollar has also contributed to the rally.
Word of caution
While many in the industry, especially those involved in crypto startups, are thrilled by the entry of large institutional investors, there are serious consequences to this. One of the features of crypto is its democracy in a sense, as the community decides on changes and the working of the network. Institutional investors with their large capital can easily buy up enough crypto, that they can use to control and change the networks to their needs. This defeats the entire purpose of crypto.
As mentioned before, many were excited about the idea of hedge funds and other institutional investors coming into the industry. But now that it has actually started to happen, we have to be careful in analyzing its implications. In case of many cryptocurrencies like Bitcoin, a large part of the coins in circulation are held by a few accounts, and the entry of big institutions can increase such large holdings. This is something that was also experienced by the equity market. Consolidation of shares by institutional investors started way back in the ’60s and has since continued to grow. We could very well see this happening in the crypto market as it becomes more regulated. There are both positive as well as negative consequences to this. And this is exactly why we as a community should decide now, whether we should allow big banks and other financial institutions to dominate crypto which was intended to challenge them in the first place.
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