Web3 in Wall Street: The Era of Institutional Crypto Adoption 

Cryptocurrency adoption has steadily increased over the years, with both individuals and institutions claiming a share in this growing ecosystem. According to the most recent crypto ownership survey by Finbold, 10.2% of the global population using the internet own some form of cryptocurrency. Most of this growth was attracted to the ecosystem between 2020 and 2021 when the crypto market rallied to new all-time highs.

Institutional Adoption: The Next Big Wave!

While the hype from the previous bull market has long since cooled down, some interesting trends have emerged that are worth keeping tabs on. Most notably, institutions are showing an increasing interest in cryptocurrency. A recent reportby The Block revealed that 52% of Fortune 500 companies have, at one point, pursued Web3 initiatives.

We know, we know….. The old song “the institutions are coming” has been sung again and again since the first BTC ETF application was filed by the Winklevoss twins a decade ago. Ever since then, it has been a sport for crypto participants to speculate when the inevitable moment would arise when institutions would flock to the ecosystem in fear of being left out.

Needless to say, that moment is still to come but perhaps the most optimistic development lately is the Bitcoin ETF filing by BlackRock. This leading global investment manager is one of the companies looking to introduce a spot Bitcoin ETF in the US market. Although the SEC has been notorious for rejecting previous Bitcoin ETFs, Bloomberg analysts are currently predicting a 65% chance of approval.

Well, that's just the tip of the iceberg. Before delving too much into the ETF topic, let's first look at what the latest data reveals about crypto institution adoption trends.

Crypto AUM is on the Rise Despite Headwinds

Now, over a decade old, Bitcoin has proven to be a viable asset class that attracts not only retail investors but also corporations. According to the latest digital asset management review by CCData, the total Assets Under Management (AUM) for digital asset investment products as of July 2023 stands at $33.7 billion, up from $22 billion a year ago. This increase is notable, especially considering the infamous Terra collapse wiped out close to half of the total crypto market capitalization last year.

As expected, most institutional investors are allocated to Bitcoin-based products, which account for 71% of the market share. ETH-based products follow at a distant second, making up 22%.

U.S. Dominates AUM, Bolstered by Grayscale's Influence

While the U.S. has yet to approve a Bitcoin ETF, institutional investors have demonstrated a significant appetite for Bitcoin and ETH-based products. Interestingly, it is worth noting that over 70% of the capital in the U.S. is funneled through Grayscale, a crypto asset manager that provides access to Bitcoin as a security via investment in the Grayscale Bitcoin Trust (GBTC).

As of July 2023, the AUM for GBTC stood at $18.6 billion. The recent change in sentiment, influenced by ETF applications, has also narrowed the GBTC discount to just above 25% — the lowest since May 2022, during Luna's Collapse.

Simply put, the GBTC discount represents the gap between the market price of Bitcoin and the value implied by GBTC’s trust share price. When this discount narrows, it indicates an increasing demand for the GBTC trust, and vice versa.

For instance, when Grayscale’s parent group DCG was facing some financial struggles earlier in the year, the discount widened to over 47%. Following Blackrock’s ETF application in June, however, the GBTC discount has decreased significantly, suggesting institutions might have already begun accumulating indirect exposure to Bitcoin through GBTC.

Source: CCData

Hedge Funds: Long in the Game

Last year might not have been a good year for many people investing in the crypto market, including hedge funds. The number of hedge funds choosing to invest in crypto assets dropped from 37% to 29%, according to a survey by PWC. However, on the brighter side, 93% of the hedge funds noted that they expect crypto market valuations to close higher in 2023 than in 2022.

A Growing Interest in Altcoins

Another noteworthy observation in the adoption of crypto assets is the exposure to everything but Bitcoin. While most other institutions are constrained when it comes to accommodating risk, crypto hedge funds have been able to leverage their risk-oriented profile to take up riskier investments in various altcoins.

Of course, Bitcoin is still the most invested-in digital asset, given its proposition as a store of value, but hedge funds are going a notch further to invest in more niche products. Some of the prominent categories include infrastructure (layer-1), DeFi, layer-2 scaling solutions, oracles, and exchange tokens, to mention a few.

Hedge Funds Gradually Shifting to DeFi

It’s been slightly over 3 years since the first DeFi governance token, COMP, was launched, kickstarting the yield farming frenzy. While the DeFi TVL is currently at $40 billion, it was once over $170 billion at the peak of the bull market. But what's more intriguing to observe is the growing use of DeFi by traditional institutions. JP Morgan carried out its first DeFi transaction on a public blockchain last year.

Meanwhile, the total number of hedge funds using decentralized exchanges (DEXs) has been on the rise since 2021, when only 31% used DEXs. The latest stats show that this figure has increased to 44%, with most hedge funds opting for Uniswap, dydx, Curve, Sushiswap, and Pancakeswap as the top 5 DEXs.

Source: PWC

Family Offices Looking to Increase Exposure

Family offices are showing increased interest in investing in digital assets, although they are still treading with caution. A recent survey conducted by UBS, of 230 family offices revealed that 56% of family offices have already invested in crypto assets. Notably, most of these family offices currently allocate just around 1% of their wealth to digital assets but more than 35% of those voiced that they were looking to increase exposure in the years to come.

Bitcoin in the Boardroom: Treasuries Turn Crypto

Until 2020, most institutional BTC investments came from private companies. However, this changed when Microstrategy famously decided to purchase $425 million in BTC.

Today, this business intelligence firm is the largest BTC holder, possessing over 150,000 BTC as of July 2023. Additionally, the company's CEO, Michael Saylor, ranks among the top 100 Bitcoin owners and is a very outspoken proponent of BTC.

Other top publicly traded companies that have invested in Bitcoin, as listed by Bitcoin Treasuries, include Tesla, Marathon Digital Holdings, Hut 8 Mining Corp, Coinbase Global, and Galaxy Digital Holdings.

NFT Collections in the Spotlight

Besides directly investing in crypto assets, other institutions are exploring NFTs, tapping into the metaverse's potential to enhance their presence in the digital realm. One notable brand making significant strides is Nike, which recently partnered with EA Sports to integrate NFT-designed apparel into video games.

According to The Block, Fortune 100 companies have generated a cumulative $1.6 billion in secondary sales from digital collections. Nike leads the pack, followed by Time Magazine and other top apparel brands, including Adidas, Gucci, and Lacoste.

Source: The Block

Is a Bitcoin ETF Around the Corner?

As mentioned earlier, Blackrock's Bitcoin ETF application in June 2023 sparked excitement, prompting more institutions to follow suit. The pressing question, however, is: Will the US SEC finally approve a Bitcoin Spot ETF?

The SEC has acknowledged receiving six Bitcoin ETF proposals, including those from Blackrock, Bitwise, VanEck, WisdomTree, Fidelity, and Invesco. But, given that they've rejected dozens of proposals in the past, it's uncertain whether any of these will be approved.

Nonetheless, it's worth noting that Larry Fink, Blackrock’s CEO, once a Bitcoin skeptic, is among the corporate leaders slowly shifting their stance. The CEO recently told Fox Business that one of the reasons for applying for a Bitcoin ETF is to "make crypto more democratized and accessible to investors.

Source: Coingecko

Whether or not the SEC approves Blackrock's ETF will be a significant determinant of the future of the crypto market. This decision matters particularly because this asset manager enjoys over $9 trillion in AUM, not to mention the reputational influence it could have on overall crypto adoption.

Major Hurdles in Crypto Institutional Adoption

In this final section, we highlight the two major hurdles that are hindering institutions from adopting cryptocurrencies. For those who have been around the block, the first one is obvious - regulation. The second issue is crypto custody, which also boils down to the security of storing funds in the digital asset ecosystem.

Regulatory Uncertainty

Operating in an uncertain regulatory environment has always been one of the biggest drawbacks for the cryptocurrency industry. According to PWC's survey, 38% of hedge funds expect their legal and compliance costs to increase this year due to the evolving regulatory landscape.

US authorities have been clamping down on service providers, particularly banks, which play a significant role in the on-ramping of institutions. And, despite a recent respite after Ripple won its case and a US judge declared it didn't fit the criteria of a security, the SEC has signaled it will be relentless in its efforts to drain the swamp.

In response to this, we are likely to see notable shifts, including companies moving to more friendly jurisdictions like Hong Kong. It's also probable that neobanks, such as Peanuds, which offer services in the crypto sector, will experience a rise in demand from institutional clients.

Custodial Solutions

Following the collapse of FTX and several crypto-oriented institutions, a worrying trend emerged: a good number of actors have not been prudent in fund segregation. Even worse, there are other major threats, including security, when it comes to crypto custody. Chainalysis estimates that 2022 was the biggest year for crypto hacking, with over $3.8 billion compromised.

Given these statistics, it comes as no surprise that over 54% of crypto hedge funds advocate for mandatory client asset segregation, while 15% further emphasize the need for independent statements of proof of reserves.

Evidently, institutional crypto adoption still has a lot of room to expand. The trends mentioned in this article are just scratching the surface. With Blackrock’s ETF in the picture, it will be interesting to see how this space unfolds in the next few years.