Institutional investors are here… but why?

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Accredited and institutional investors are increasing their exposure to digital assets. 

Over the past few months, we have seen legacy financial institutions increasingly discuss digital assets and express that they are seeing client demand for digital currencies.

Today, Goldman Sachs announced that they are looking to offer Bitcoin and other digital assets to its clients in Q2 2021; and earlier this month, Morgan Stanley announced that they would begin offering their wealth management clients access to at least one digital currency-related fund.

For years, we have heard blockchain and digital currency enthusiasts spread the rumor that “institutional investors are coming,” and that when they arrive, the blockchain and digital currency space would take off. 

Well now, those institutional investors are here, and the blockchain and digital currency industries have both had positive performances since the accredited investors, institutions, and corporations began building digital currency portfolios and enabling digital currency support.

Who has gotten involved?

Beyond Goldman Sachs and Morgan Stanley, several corporations, such as Tesla, Microstrategy, and Square Crypto among many others have added digital currency to their portfolios.

Outside of the companies that are merely accumulating digital assets, some companies have integrated digital currency into their operations. Visa has implemented a digital currency solution into its payment settlement layer, letting its partners settle their payments in USDC.

PayPal has also integrated a digital currency solution into its payments layer, and now lets consumers pay for goods and services in four different digital currencies at check-out.

And Bakkt, the digital currency custodian launched by Intercontinental Exchange (the owner of the New York stock exchange) has launched a digital asset marketplace that gives all digital assets (digital currency, loyalty points, gift cards, etc) increased liquidity and interoperability. 

Why now?

As I mentioned above, blockchain enthusiasts have been waiting for legacy financial institutions and corporations to enter the digital currency industry for years–so why have they just decided to play more significant roles in the digital asset industry? 

There are several right answers to that question, from the fact that legacy finance would like more control over the digital asset industry and its money flows, to the fact that retail investors are increasingly becoming interested in digital assets and therefore, legacy institutions have to meet that demand.

But the factor that I would like to take a closer look at is that unlike the digital currency boom in 2017, the global economy is in bad shape.

The Coronavirus effectively shut down countries, major cities, and local economies when many businesses closed their doors for a period of time. When businesses closed their doors, they were not generating revenue, which caused many businesses to shut down shop for good, or to lay off workers. As a result, many people and economies entered a state of financial turmoil, a state that most cities and countries are actively trying to recover from.

In the United States, the solution has been to create several stimulus packages that require the Fed to print more money, give U.S residents “free money,” and give businesses forgivable loans and aid. 

However, as the money supply grows and more money begins circulating, the money supply becomes inflated and investors begin to fear the negative consequences of inflation, such as a weak dollar and the effect it has on asset prices. As economic problems persist, the Fed continually meddles by implementing monetary and fiscal policies in an effort to either give the economy the boost it needs to return to “normal” or to slow the economy’s rapid growth so that it returns to “normal.”

Where do investors hide?

Gold used to be the asset that many investors turned to in times of economic turmoil, it was one of the only forms of money that remained relatively unaffected by the policies the Fed implemented to “help the economy.” But gold is far from a perfect form of money, it is not very liquid, transaction fees accompanied with buying and selling gold can be steep, and younger generations are simply not interested in gold as an investment the same way that boomers are.

In addition, financial institutions are federal governments have immersed themselves in gold markets to the point where they do seem to have a bit of influence and impact on the economics of the gold market. (Digital currencies may face this problem in the future, but we’ll save that story for another day.)

The problems the economy is experiencing, the helping hand the Fed tries to play, and the decreasing popularity of gold are a few of the top reasons that digital assets are increasing in popularity and price, and as a result, are why institutional investors and legacy financial institutions are interested in supporting digital currency in increasing capacities.

Fed-free money

Digital currencies have economic similarities to precious metals like gold, however, are arguably a better form of money than gold and are free from government manipulation. Both gold and digital currency serve as a hedge against inflation since they are priced in dollars, however, digital currency is much more liquid than gold, and the transaction fees associated with buying digital currency or selling digital currency are much lower than the transaction fees associated with buying and selling gold.

But more importantly, digital currencies are free from federal government manipulation–the Fed cannot implement monetary or fiscal policy that directly impacts digital currency. Some of the policies that the fed implements may make digital currency a more or less appealing investment compared to other assets, commodities, and equities, but the policies implemented will not directly impact the economics of digital currency.

Given the problems the global economy is experiencing, and the way that the Fed is intervening to bring the economy back to “normal,” many investors have turned to digital currencies since digital assets go unscathed, and actually benefit, from the measures the Fed is taking to boost the economy at the moment.  

That being said, the economy appears to be far from “normal,” and many people in the United States are expecting the Fed to sign yet another economic stimulus package to boost the economy. As more money continually enters the money supply, and the US Dollar becomes weaker, investors are going to look for alternatives, they are going to look for locations to park their money that will outperform the assets, commodities, and equities that the Fed can manipulate by implementing policy. They are going to turn to–and have already started turning to–digital assets.

This explains why accredited and institutional investors, as well as corporations, are becoming increasingly interested in allocated their US Dollars in digital assets–because they believe the action(s) that the Fed will take will be bad for their assets, commodities, and equities, but beneficial for digital currencies.