The size and scope of the crypto-currency industry has grown significantly. The growth of crypto users since 2014 continues to follow the trajectory of internet adoption in the 1990s.
According to Triple A' Research, a Singapore-based digital asset payments company, global crypto ownership rates averaged 4.2% this year, which translates into more than 320 million digital asset users worldwide, with the US in pole position with 46 million users.
Despite price fluctuations and bear markets, the total capitalisation of the crypto-currency market and its trading volume have increased over the past decade. These indicators show that bear markets do not stifle the adoption of crypto-currencies but rather strengthen them.
Another interesting indicator is the increase in the number of global users of blockchain wallets from 2011 to 2022, as shown in Figure 1. It can be seen that blockchain users were less than one million between 2011 and 2013, but have grown linearly to reach 80 million by February 2022.
While the use of crypto-currencies is clearly on the rise, what is happening to the adoption of traditional finance actors?
Following the crypto bull market in 2021, institutional investors are becoming increasingly familiar with this new asset class. Institutional adoption of any tradable asset is a gradual process that comes with the maturation and evolution of the asset in question. Crypto-currencies are no different.
Crypto-currencies have been around for over a decade now. As in other sectors, decentralised financial instruments such as DeFi began by catering to individual consumers, but their growing popularity and use has left large institutions with no choice but to begin defining their strategies for incorporating crypto-currencies into their business models.
The result is that institutional investors such as hedge funds and pension funds are becoming increasingly comfortable with cryptos.
The "Global Crypto hedge fund Report 2022" published by PWC revealed that more than a third of traditional hedge funds are now investing in crypto-currencies. Pantera Capital, founded by Dan Morehead in 2003 launched the first crypto fund in 2013. Recently, Braven Howard, a global asset manager with $25 billion in assets under management completed the largest crypto-currency fund launch with a raise of over $1 billion from institutional investors.
According to the latest Fidelity Digital Assets survey, a majority of institutional investors are interested in digital assets: nearly 8 out of 10 institutions surveyed responded that cryptos and digital assets "have a place in a portfolio".
A report from EY mentions that nearly a quarter of fund managers plan to increase their exposure to crypto-currency assets over the next two years, while in 2021 alone, institutional inflows into the crypto-currency markets had reached a record $9.3 billion, a 36% increase from 2020.
JP Morgan Chase, Morgan Stanley, Deutsche Bank and Goldman Sachs have opened the Bitcoin space to their clients. Goldman Sachs recently announced that it is now offering its first ever Bitcoin-backed loan, as part of a significant expansion of its crypto footprint.
Fidelity said the following month that it would allow savers to allocate a portion of their retirement savings to Bitcoin through the company's 401(k) investment lineup.
Finally, BlackRock's jump into crypto-currency is a strong sign that institutions are looking beyond the volatility of the market. Indeed, the world's largest asset manager said it has partnered with Coinbase to offer access to crypto-currencies to its institutional clients.
Blackrock and Fidelity alone manage over $12 trillion in assets. With a market capitalisation of less than $400 billion, adoption of Bitcoin is still in its infancy.
These various investments made by a large number of major financial players over the past 12 months that are related to building infrastructure for bitcoin and crypto-currencies are another indication of the expectations for the adoption of crypto assets by institutions in the long term.
As can be seen in the chart below, a growing and significant share of less constrained institutional investors, such as family offices, have already started to allocate a small portion of their assets to outright exposure to crypto-currencies.
Creating an enabling environment for crypto-currency growth
Crypto-currencies are clearly gaining traction at the institutional level, but this does not mean that adoption is widespread. Regulation, trust and infrastructure remain a key barrier to entry for many institutions looking to expand their crypto offerings. Establishing regulations for this asset class is an essential step in achieving this.
Having access to compliant, secure exchanges that provide clear, real-time pricing will be vital in addressing these operational challenges, providing institutions with the toolkit they need to leverage and integrate crypto into their services.
However, institutions need a high level of infrastructure before they can get started. Accounting services are one of the most essential pieces of financial infrastructure. Custodians of crypto-currencies are also essential for mass adoption by institutions. But one of the most crucial pieces of financial infrastructure is to have well-designed rules and a level playing field for all participants.
Another element making institutional investors reluctant is the carbon bill of blockchain technology and its treatment as a non-ESG asset.
This week, the biggest update to Ethereum (ETH) since its launch in 2015 will mark the arrival of ETH 2.0. "The Merge" is estimated to take place on September 15 or more precisely when the Total Terminal Difficulty (TTD) reaches 58750000000000000000000. *
In concrete terms, Ethereum should switch from the Proof-of-Work (PoW) consensus mechanism to the Proof-of-Stake (PoS) consensus mechanism, which is much less energy consuming. This should allow the blockchain to reduce its energy consumption by more than 99%. Post-meltdown ether could therefore feature prominently in future portfolio allocations.
The transition could make ether more palatable to climate-conscious investors who have avoided crypto-currencies until now. Pension funds and other asset managers are facing external pressure, both from regulators, who are pushing the industry to adopt more sustainability measures, and from investors, who are demanding more sustainable investments.
What are the next steps?
The adoption of crypto-currencies by the institutional community will undoubtedly enhance the development of crypto-currencies as institutions seek to develop decentralised products for their own investor base. This process is already underway, with a growing number of institutions allowing their customers to trade, store, borrow and lend against their digital assets.
Crypto-currencies, mainly Bitcoin and Ethereum, are emerging as a new asset class. However, it is still early days.
Institutional investors have unimaginable amounts of capital, and if they were to allocate even a fraction of their holdings to digital currencies, we could see a significant price increase.
A quick calculation shows that if US pension funds were to allocate 1% of their total assets to bitcoin, this would represent 60% of the total bitcoin market capitalization.
In conclusion, it is better to be prepared!
*The TTD corresponds to the difficulty of the last block mined in Proof of Work (PoW) and the next block produced via Proof of Stake (PoS). On blockchains we don't count in days and hours but in blocks, that's why there is no precise date of the Ethereum merge time, but a number of blocks. Once the block with the TTD is reached, the migration will take place.