How Are Institutions and Companies Investing in Crypto?

From putting bitcoin on their balance sheets to setting up shop in the metaverse, the ways brands and institutions are investing in cryptocurrencies continues to expand.

Ekin Genç has written for Bloomberg Businessweek, EUobserver, Motherboard, and Decrypt.

For years, the idea that traditional finance institutions would invest in bitcoin (BTC) was laughable. But as of mid-2020, the institutional presence in the cryptocurrency became a reality. Many cite the foray of “the suits” into crypto as a contributing factor to the latest bull run that began in late 2020 and ended in late 2021.

Institutional interest in the cryptocurrency market excites current investors because institutions bring in fresh money, and certainly more money than retail can pour in.

Bitcoin, the largest cryptocurrency by market cap, is the gateway – and indeed the only stop – for many institutions that ventured into the cryptocurrency market. As of June 2022, 6.47% of all bitcoin that will ever exist is held by institutions, a broad category that includes ETFs like VanEck in Canada and sovereign governments like El Salvador.

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Bitcoin treasuries (buybitcoinworldwide.com)

Although bitcoin is often the first and the final step for major institutions, experimental institutions have recently stepped into other parts of the crypto industry. NFTs and the metaverse are two intertwined sectors in which institutions actively invest – rather than just passively investing in a cryptocurrency like bitcoin.

Bitcoin

The most straightforward way of investing in crypto for institutions is to hold cryptocurrency on their balance sheets.

The institutional presence in crypto began in earnest when MicroStrategy, helmed by Bitcoin maximalist Michael Saylor, bought $250 million worth of bitcoin in August 2020, followed by an additional $175 million in bitcoin one month later. MicroStrategy’s big step was followed by payments processor Square’s $50 million BTC purchase in October 2021 and EV manufacturer Tesla’s $1.5 billion BTC in February 2021.

The first mover continues to be the biggest holder. MicroStrategy owns 129,218 BTC in its stashes, accounting for 0.615% of the 21 million bitcoin that will ever exist. Tesla comes in second with 42,902 BTC, or 0.204% of all the possible Bitcoin supply.

Institutional activity in crypto is a double-edged sword. In May 2021, Tesla reversed its decision to accept payments in bitcoin over environmental concerns after less than two months of trialing the cryptocurrency as a payment method for its cars. This about-face contributed to a large sell-off in the cryptocurrency market.

Bitcoin mining companies or groups, which receive bitcoin rewards for validating transactions on the network, are another category of institutions holding the largest cryptocurrency.

There are also indirect ways institutions invest in bitcoin. Exchange-traded funds, or ETFs, are the most common indirect form of investment. Although there are bitcoin spot ETFs in Canada and Europe, the financial instrument isn’t approved in the US. Instead, there are ETF-like instruments, like the Grayscale Bitcoin Trust, a closed-end trust that tracks the value of Bitcoin. (Grayscale Investments, which manages the trust, is a unit of Digital Currency Group, which also owns CoinDesk.) It had $18.5 billion worth of assets under management (AUM) as of June 2022.

Another alternative to bitcoin spot ETFs comes in the form of Bitcoin futures ETFs, which invest in bitcoin futures contracts. ProShares’ Bitcoin Strategy ETF (BITO), and several others, were approved in late 2021 by the SEC, ratcheting up the price to new highs.

Bitcoin as part of a retirement strategy is another recent development. In April 2022, Fidelity Investments, the largest 401(k) provider in the United States, began offering exposure to Bitcoin through its 401(k) plans. If employers approve, Americans could invest in the cryptocurrency through their retirement savings.

DeFi

Decentralized finance is a corner of the crypto industry with billions of dollars locked into smart contracts. Smart contracts are self-executing pieces of code that enforce contractual agreements between parties. DeFi runs on smart contracts that power decentralized apps (dApps), which offer a range of financial services such as:

  • Loans
  • Insurance
  • Interest-bearing accounts

Although on the surface, DeFi looks like the opposite of traditional finance, both industries have overlapping interests; there have been innovative collaborations recently.

Some DeFi platforms actively try to lure institutional investors. DeFi lending protocol Compound set up in June 2021 an institutional gateway called Compound Treasury. S&P Global Ratings, a credit rating agency for traditional finance institutions, awarded Compound Treasury with a B- grade, which means the USDC-powered yield platform ranks as "speculative" but "currently has the capacity to meet financial commitments.”

Instead of waiting for the institutional alternative to set up shop, some institutions go directly to DeFi protocols.

In October 2021, French investment bank giant Société Générale (SocGen) submitted an application on MakerDAO’s governance forum for the lending platform to accept its on-chain digital covered bonds, OFH Tokens. These tokens were issued by the bank as collateral for a $42 million loan in stablecoin DAI. As of June 2022, the negotiations over technical details continue.

Central banks are also exploring DeFi. In May 2022, Singapore’s central bank, the Monetary Authority of Singapore (MAS), launched Project Guardian, a pilot program in partnership with DBS Bank, JPMorgan and Marketnode to explore use cases of digital assets in tokenization and decentralized finance (DeFi). In the first step of the project, the bank will create a liquidity pool of tokenized bonds and deposits for borrowing and lending purposes.

Speaking at CoinDesk’s Consensus 2022 conference, Tyrone Lobban, head of Onyx Digital Assets at JPMorgan, said that the bank is mulling over tokenizing U.S. Treasuries or money market fund shares. “The overall goal is to bring these trillions of dollars of assets into DeFi, so that we can use these new mechanisms for trading, borrowing [and] lending, but with the scale of institutional assets,” Lobban said.

NFTs and the metaverse

Some brands have circumvented the usual bitcoin-first route and headed straight into non-fungible tokens (NFTs), or digital assets mostly hosted on the Ethereum blockchain.

Some companies have invested in crypto domain names, particularly the Ethereum Name Service (ENS) that are sold as NFTs. Beer company Budweiser purchased beer.eth for 30 ETH and also launched an NFT collection. Following Budweiser, other food and beverage companies entered NFTs. Taco Bell (YUM), for instance, sold tokens to raise funds for a variety of purposes. Arizona Iced Tea bought a Bored Ape NFT and put it on its can.

Closely linked with NFTs is the metaverse, an oft-ambiguous term that refers to a digital space where humans interact with one another through avatars. Since Facebook rebranded to Meta in October 2021, multinational corporations have beefed up marketing and strategy investments in the metaverse.

Although CEO Mark Zuckerberg's idea of the metaverse primarily entails VR-powered workspaces called “infinity offices” and isn’t necessarily built on a public blockchain, for the crypto industry the metaverse revolves around virtual land and gaming environments like The Sandbox and Decentraland.

In November 2021, Barbados opened up an embassy in Decentraland, and in January 2022, the Warner Music Group (WMG) unveiled plans for a music theme park in The Sandbox. HSBC also bought a plot of land in The Sandbox with plans in the future ”to engage with sports, e-sports and gaming fans.”

Since the metaverse is a virtual space where avatars interact with one another, these avatars surely need pieces of digital clothes. In December 2021, footwear giant Nike (NKE) acquired NFT collectibles and fashion startup RTFKT for an undisclosed amount. RTFKT produces virtual sneakers.

Although there are shopping malls being built in the metaverse, mainstream adoption still has a long way to go. “I don’t think anyone can put a time or date, but I will say that this decade is a decade of building and pioneering,” Cathy Hackl, aka the Godmother of the Metaverse, told CoinDesk in December 2021.

This article was originally published on Jun 24, 2022 at 9:27 p.m. UTC

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Ekin Genç has written for Bloomberg Businessweek, EUobserver, Motherboard, and Decrypt.

CoinDesk - Unknown

Ekin Genç has written for Bloomberg Businessweek, EUobserver, Motherboard, and Decrypt.


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