A few years back, many retailers decided to put their money in a bitcoin cryptocurrency. Visit bitcoin system app to avail the best bitcoin trading features such as 100% accurate trading calls, customer care support, and proper guidance. Invariably, institutional investors are also inclined toward bitcoin due to its impressive features as a currency and an investment vehicle.
The bitcoin ecosystem is mature, and volatility is decreasing daily. While it is true that the volatility/risk of bitcoin investment is a thing of the past, it does not mean that bitcoin is terrible for institutional investors. Certain developments are necessary to make bitcoin bankable for institutional investors. Here we are going to analyze the current position of the bitcoin ecosystem, which is ideal for institutional investors.
Institutionalization of Bitcoin
Bitcoin is an organized decentralized system that is highly scalable and secure. However, for institutional investors, these characteristics mean that you must meet specific criteria before getting into the bitcoin market. Here are a few things institutions need to consider:
Any authority does not regulate Bitcoin, so governments are in the process of defining the future regulation of bitcoin. Cryptocurrency exchanges like Coinbase and Gemini, which act as a custodian for the investors’ funds, have registered themselves with government authorities. It ensures that they are accountable to government regulators.
Type 1: retail investors:
Bitcoin is the only currency in the world that has a finite supply. It is like gold, which can never be increased (or decreased) beyond a specific number. As we are already aware of the finite nature of bitcoins, it does not seem feasible to sell bitcoin as securities to institutional investors. For a cryptocurrency to be regulated as a security, it needs to be infinitely reproducible, i.e., fiat currencies.
Type 2: Investors in the institutional market
We expect that bitcoins will be regulated just like how various governments across the globe regulate gold. Although there are few regulations in place as of now, it is likely that the remaining governments will decide on capital gains tax and know your customer KYC norms for bitcoin exchanges and wallets.
Bitcoin is an inflation-resistant currency and a deflationary system. For any investment to be bankable, it must provide long-term growth potential for its investors. Volatility for bitcoin is decreasing every day, and it does not have any significant short-term effects on the price of bitcoin. Investors who are looking for short-term returns should invest in futures or derivatives. Bitcoin provides a very stable environment for holding long-term investments where institutional investors can hold their investments in bitcoin along with other assets they hold as part of their investment portfolio.
Investors who want to invest in bitcoin do not need to go through a lengthy process of character verification based on the Know Your Customer (KYC) procedure because of the decentralized cryptocurrency exchange.
Type 3: Institutional investors who make use of brokers
As bitcoin is a digital currency that avoids many of the centralization concerns that traditional financial institutions face, the government of any country would not ban bitcoin. Therefore, even if the governments decide to regulate or ban bitcoin, it does not mean that institutional investors will have to stop investing in bitcoins.
Many banks worldwide are establishing their positions as banking partners for bitcoin exchange companies. It has resulted in OTC (Over-the-Counter) trading facilities like Chicago Mercantile Exchange and Dubai International Financial Exchange (IFX) becoming active in trading bitcoins with their customers. These brokers provide services like margins trading, swaps, and CFD (Contracts For Differences).
4. Institutional investors seeking assets that are broadly recognized:
Bitcoin is a risk-free token. As the demand for bitcoins increases, the value of bitcoin increases. The current value of one bitcoin is ~$630. Bitcoin has no central point of failure, making it a suitable digital currency as a safe asset investment option. Institutional investors invest in bonds, shares, and real estate rather than fixed income instruments like treasury bills or bonds due to their limited returns.
Bitcoin presents an ideal medium between fiat currency and cryptocurrency, which can act as an underlying asset in portfolios. Furthermore, as per the recent surveys conducted by Barclays PLC, blockchain technology is expected to be used by banks across the globe by 2026 to replace existing payment systems and settlement networks with its blockchain-based distributed ledger technology (DLT).
As bitcoin is being used as a new asset class by institutional investors, the need for bitcoin derivative products like futures and options increases. In addition, due to regulatory compliance from bitcoin exchange companies, the trust level among investors is also increasing.
We will see big institutions entering the bitcoin market in 2021, which will increase scrutiny of bitcoin exchanges by many governments worldwide.