Crypto Investing
18 Jan 2022

How Financial Institutions are Investing in the Crypto Market

Deepan Datta

There is an adage in the market- “ride the trend, it’s your friend”

So, how do you identify a trend and the strong undercurrent prevailing in the market? It’s pretty simple, follow what the big players are doing in the market—big players as in the institutional investors. 

Institutional investors play an important role in price discovery, market stabilisation, and improving allocative efficiency in any market. They are financially savvy people and act as stabilising forces in the market. Institutions don’t get in and out of their investments too quickly and are not prone to panic selling. 

This blog will discover how institutions invest in the crypto market and contribute to its development. 

To keep things simple, the blog is divided into two segments- how venture capitalists are investing and how financial institutions are investing in cryptos. So, let’s begin. 

Key Takeaways

  • VCs are aggressively investing in crypto firms
  • Average seed funding of crypto projects has increased to $3.3 million in 2021 from $1.5 million
  • 55% of the top global banks have exposure to crypto assets
  • Pension and sovereign wealth funds are also investing in crypto assets

Where are Institutions Pouring their Money into the Crypto Market?

Until 2020, the crypto market was primarily driven by retail investors. But everything changed that year as aggressive participation from institutional investors led to explosive growth. It brought cryptos back into the focus of people, governments, and policymakers, who previously discarded the technology as a pyramid scheme and bubble. 

VC Investment In Crypto Market

Similarly, 2021 has been the year of another shift in the cryptocurrency market. Venture capitalists invested a record $30 billion globally during the year in the cryptosphere. A testimony to the world, cryptocurrencies are the future, and it’s hard to stop them from growing.

So, how do VCs deploy their capital in the crypto market? The data is scattered, but there is a pattern. 

VC firms like a16z, Pantera Capital, Ribbit Capital, Paradigm, Coinbase Ventures, Sequoia Capital are aggressively investing in crypto firms. 

Like Andreessen Horowitz (a16Z), VCs have raised $2.2 billion for their crypto fund. Pantera Capital is raising close to $1 billion for its blockchain fund, Paradigm- a crypto VC firm recently announced its $2.5 billion crypto fund to invest in the growth of the cryptocurrency market. 

Investment in exchanges forms a major part of the portfolio of these VC firms, followed by investments in Data/Privacy/Security Infrastructure, DeFi, NFTs, etc. 

According to Pitchbook, VCs poured money across 1278 crypto projects in 2021 (up to November). The average day in 2021 saw blockchain start-up projects raising at least $20 million in funding, and the average seed amount has risen to $3.3 million in 2021, from $1.5 million in 2020. 

At the moment, Web 3.0 is the melting pot, attracting loads of institutional investors, money and talent. 

Looking at the portfolio allocation of top VC firms, a16z has invested close to 13.2% in each segment- Data/Privacy/Security Infrastructure and Digital Assets, NFTs, and creators. It has made investments in UniSwap (DEX), Trust Token, Solana, OpenSea, MakerDAO, NEAR Protocol, AVA Labs, KEEP, etc., all involved in the development of the Web 3.0 ecosystem. 

Similarly, Coinbase Ventures has allocated a significant portion of the fund into Data/Privacy/Security Infrastructure- almost 19%, and nearly 12% in crypto exchanges. 

invest in crypto

Financial Institution Investment in Crypto Market

Financial institutions include large banks, hedge funds, private equity funds, and global pension funds. Compared to VCs, they invest and trade in the secondary market.

According to the EY’s  2021 Global Alternative Fund Survey, one in four hedge fund managers expects to increase crypto exposure in the next one to two years. It notes:

Alternative fund managers have become more active participants, drawn by uncorrelated return profiles and continued investment in institutional-grade infrastructure to support this evolving asset class.

There are some exciting findings in the 3rd Annual Global Crypto Hedge Fund 2021 report by PwC. The report was published in Q1, 2021. The crypto hedge fund’s total asset under management has almost doubled, from $2 billion to $3.8 billion in 2020. And, the vast majority of investors in crypto hedge funds are either HNIs- High Net-worth Individuals (54%) or family offices (30%), with an average investment size of $1.1 million. 

Most crypto hedge funds trade in BTC, ETH, LTC, LINK, DOT, and AAVE. They are also involved in cryptocurrency staking (42%), lending (33%) and borrowing (24%).

If you think pension and sovereign wealth fund managers will keep a conservative approach to investing in cryptocurrencies, you should correct your thinking. 

Houston Firefighters’ Relief and Retirement Fund (HFRRF) announced in 2021 that it was investing $25 million in bitcoin, the first time a U.S. pension fund invested in cryptocurrencies.

Instead of investing directly in cryptocurrencies, fund managers invest in crypto at arm’s length through trust funds and companies exposed to crypto-assets. For instance, Altshuler Shaham, an Israeli pension fund company, invested $100 million in the Grayscale Bitcoin Trust Fund. 

Global banks, which tried to kill the crypto movement, are now heavily investing in this novel asset class. Reason- they simply cannot ignore the revenue stream. Also, the returns are uncorrelated with other traditional investments options, which gives it an edge. 

As per reports, 55% of the top global banks have exposure to crypto assets, including JPMorgan, Barclays, Citi, BNY Mellon, Goldman Sachs. 

Summing up…

After initial disapproval and doubts, financial institutions have started investing in cryptocurrencies in a big way. And they’re at a point where there is no turning back. 

Also, you cannot ignore the investment in bitcoin by large corporations and publicly traded companies like Tesla, MicroStrategy, Coinbase. They are very vocal about their investments in cryptocurrencies and have openly endorsed the technology. 

With institutions getting involved in a big way (participation will only increase), regulations of cryptocurrencies are the only option for governments all around the world. Furthermore, El Salvador’s acceptance of bitcoin as a legal tender has strengthened the case for bitcoin and cryptocurrencies. 

Download the CoinSwitch Kuber App and explore the world of Web 3.0 and DeFi projects.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Deepan Datta

Content Writer

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