As crypto’s stature and value in the global economy has grown, the sector has attracted increasing interest from institutions such as banks, hedge funds and other investors which had previously shunned the market.
In its early days, crypto natives had a tough time convincing many of these companies to invest in the market.
The reasons for the reluctance were varied, ranging from concerns over compliance issues to misunderstandings over the potential of the technology and its broader benefits.
Fast forward to the present day, and TradFi institutions including industry behemoths JPMorgan, Goldman Sachs, Softbank and the like are all involved, in one way or another, with Web3 and DeFi.
The degree of involvement varies by company, but what is becoming clear to the mainstream financial markets is that crypto is here to stay and is fundamentally changing the structures, practices and opportunities in the economy.
But what crypto are institutions buying?
Let’s take a look at how institutional players are getting involved in Web3.
One of the most obvious ways institutions are interacting with crypto is through the major protocols, namely Bitcoin and Ethereum.
The scale of the investment opportunity is one attraction for institutions, but the increasing adoption of these assets by players outside of the crypto industry has had a domino effect as more and more firms have spied an opportunity for themselves.
Aside from impressive though volatile investment returns, the potential for these types of widely-used chains to improve trade times, payment processes and other aspects of traditional finance has also gained the attention of institutions.
That interest has culminated in the emergence of exchange-traded funds (ETFs) and other ways for traditional players to gain exposure to the market indirectly, in addition to their direct efforts.
Decentralized finance (DeFi) is another vertical of Web3 which has attracted significant institutional interest.
With opportunities ranging from higher lending yields than those available in the mainstream economy, a growing insurance market and the opportunity to stake assets, DeFi is a natural fit for many institutions such as banks which have existing expertise in these areas outside crypto.
At the end of the day, economics is all about supply and demand, and as the clients of institutions have increasingly entered the crypto space, the companies themselves have naturally followed.
From OTC trading desks to bitcoin-collateralized credit lines, the banks and other institutions have stepped up to meet the changing needs of their customer base, and a whole sub-industry has emerged to facilitate crypto wealth in the traditional economy.
Non-fungible tokens (NFTs) exploded in popularity over the past year, and a whole host of companies ranging from Adidas and Budweiser to Louis Vuittion and Pizza Hut have gotten in on the action.
But some financial institutions are looking at NFTs beyond the use of images and Bored Apes.
Many processes and documents within traditional finance rely on signatures, proof of ownership and other aspects enabled by NFTs.. This could see NFTs being used in cases such as bond issuances or mortgages in future.
Want to find out more about how institutions are getting involved in crypto?
Check out our deep dive into what counts as an institutional investor, or our analysis of the barriers that need to be overcome for institutions to get into crypto.
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