Institutional Interest Continues to Drive Investment in Innovative Blockchain Companies

The blockchain sector is expanding, even though it is still in its infancy. There are no centralized databases in blockchains. Databases are shared through network nodes. They guarantee that cryptocurrency, such as Bitcoin, transactions are secure and decentralized. Using blockchain technology, data records are secure and valid. Trust can be established without a third party. Various businesses are involved in the blockchain industry. Among them are blockchain technology developers, crypto miners, and fintech firms to name a few.

Business transactions between entities can be facilitated by blockchain as well. The same data can be accessed by permissioned users using blockchain technology. Through this, efficiency can be enhanced, trust can be fostered, and friction can be reduced. Additional benefits of blockchain technology include the ability to scale and grow solutions. In many cases, these activities will be carried out by different companies and may change over time. The technology of blockchain is characterized by four distinctive characteristics. All involved parties must approve trades before a public blockchain can be updated. The history of a transaction is recorded in a block. All channel participants are affected by this action when approval is granted. Every transaction is recorded for a lifetime by the system. The reason for this is that more blocks might be inserted but not withdrawn. This fosters a greater sense of trust among stakeholders. Entities with authorization can only create and access blocks. Only reliable partners receive access authorizations.

With the rise of so many blockchain companies and the world of blockchain gaining momentum and popularity, why is this a certain field of interest to institutional investors? Let’s find out.

Why Are Institutions Increasingly Showing Interest in Blockchain Companies?

Cryptocurrencies and digital assets are becoming increasingly important to operating companies. Compared to more conventional investments in this space by funds and others, this is a new dynamic. Most recently, between September 2021 and June 2022, Alphabet invested the most in the space among publicly traded companies. Blockchain intelligence platform Blockdata used the size of funding rounds to measure investor participation. According to Blockdata's study, Google invested $1.5 billion in four blockchain companies - Fireblocks, Dapper Labs, Voltage and Digital Currency Group - in the last 10 months. BlackRock and Morgan Stanley also contributed significantly to funding blockchain startups over the study's time frame. In addition to Goldman Sachs, BNY Mellon, Citigroup, and Wells Fargo, the list also includes other top Wall Street banks. The South Korean tech giant Samsung reportedly participated in 13 blockchain-related funding rounds between September 2021 and June 2022, making it the most active investor in the sector. It was revealed that Blockdata had participated in funding rounds for 13 companies, including climate tech venture Flowcarbon, Bored Apes Yacht Club issuer Yuga Labs, blockchain gaming company Animoca Brands, and Sky Mavis' owner of Axie Infinity, according to a blog published by the tech company.

Investing in bitcoin (BTC) by traditional financial institutions was unheard of for many years. It wasn't until mid-2020 that institutional investors started to invest in cryptocurrencies. It is believed that the entry of "the suits" into crypto in late 2020 and early 2021 contributed to the latest bull run. Current investors are excited by institutional interest in the cryptocurrency market since institutions bring fresh money into the market, and certainly more money than retail can invest. Many institutions entering the cryptocurrency market enter through Bitcoin, which is the largest cryptocurrency by market cap. Institutions, such as VanEck in Canada or sovereign governments like El Salvador, hold 6.47% of all bitcoin that will ever exist as of June 2022. Institutions have recently stepped outside Bitcoin to explore other parts of the crypto industry, although bitcoin is often the first and final step for them. Rather than passively investing in a cryptocurrency like bitcoin, institutions invest actively in NFTs and the metaverse.

Ways Institutional Investors are Investing in Blockchain Companies

For institutions, holding cryptocurrency on their balance sheets is the most straightforward way to invest in crypto. After MicroStrategy, helmed by Bitcoin maximalist Michael Saylor, purchased $250 million worth of bitcoin in August 2020, followed by $175 million a month later, institutional interest in crypto started picking up. Square, the payments processor, invested $50 million BTC in October 2021, followed by Tesla, the EV manufacturer, who invested $1.5 billion. The biggest holder is still the first mover. The amount of bitcoins MicroStrategy owns in its stashes is 129,218 BTC, or 0.615% of the total 21 million bitcoins ever created. Almost 0.204% of all the possible Bitcoins are held by Tesla with 42,902 BTC.

Companies or groups that mine bitcoins are another category of institutions in possession of the largest cryptocurrencies, which are rewarded for validating transactions on the network. Additionally, institutions can invest in bitcoin in indirect ways. A common indirect investment form is exchange-traded funds, or ETFs. Despite the existence of bitcoin spot ETFs in Canada and Europe, the financial instrument is not approved in the United States. In place of ETFs, there are closed-end trusts that track Bitcoin value, like the Grayscale Bitcoin Trust. As of June 2022, Grayscale Investments, which manages the trust, had $18.5 billion in assets under management (AUM) and is also owned by Digital Currency Group.

The Bitcoin futures ETF, which invests in bitcoin futures contracts, is another alternative to a bitcoin spot ETF. As a result of ProShares' Bitcoin Strategy ETF (BITO), as well as several others, the price of bitcoin reached new highs in late 2021. Another recent development is the use of Bitcoin for retirement planning. 401(k) plans offered by Fidelity Investments, one of the country's largest 401(k) providers, started offering Bitcoin exposure in April 2022. Americans may be able to invest their retirement savings in cryptocurrencies if their employers approve.

Institutional Investors Turn to Decentralized Finance (DeFi)

With billions of dollars locked into smart contracts, decentralized finance is a cornerstone of the crypto industry. The purpose of smart contracts is to enforce contractual agreements between parties through self-executing code. Smart contracts underlie DeFi, which offers financial services through decentralized apps (dApps), including loans, insurance, and interest-bearing accounts. DeFi appears to be the opposite of traditional finance on the surface, but both industries share overlapping interests; innovative collaborations have recently been formed. Institutional investors are actively targeted by some DeFi platforms. The DeFi lending protocol Compound established a gateway for institutions called Compound Treasury in June 2021. The USDC-powered yield platform is rated B- by S&P Global Ratings, which means it is "speculative" but currently can meet its financial commitments.

Some institutions choose DeFi protocols directly instead of waiting for institutional alternatives. An application from French investment bank giant Société Générale (SocGen) for MakerDAO's governance forum to accept its on-chain covered bonds, OFH Tokens, was submitted in October 2021. In exchange for a stablecoin loan in DAI, the bank issued these tokens as collateral.

?DeFi is also being explored by central banks. To explore the use cases of digital assets in tokenization and decentralized finance, Singapore's central bank, the Monetary Authority of Singapore (MAS), launched Project Guardian in May 2022 in partnership with DBS Bank, JPMorgan and Marketnode. A liquidity pool of tokenized bonds and deposits will be created by the bank as the first step in the project. A member of JPMorgan's Onyx Digital Assets team, Tyrone Lobban, told CoinDesk that the bank is considering tokenizing U.S. Treasury notes or money market fund shares at the Consensus 2022 conference. Ultimately, Lobban says, it is a goal to bring trillions of dollars of assets into DeFi so that we can use these new mechanisms for trading, borrowing, and lending on a scale as large as institutional assets.

NFTs and Metaverse: New Institutional Interest

There are some brands who have bypassed bitcoin and entered directly into non-fungible tokens (NFTs), which are mostly Ethereum-based digital assets. A number of companies have invested in crypto domain names, especially Ethereum Name Service (ENS) that is sold as a new form of currency (NFT). The beer company Budweiser purchased beer.eth for 30 ETH and launched its own collection of NFTs. As a result of Budweiser's success, other food and beverage companies have entered NFTs as well. One such example is Taco Bell (YUM), which sold tokens to raise funds for its own reasons. A Bored Ape NFT was placed on the can of Arizona Iced Tea after it was purchased by the company.

In addition to NFTs, there is the metaverse, an often ambiguous term for an environment where humans communicate using avatars. The metaverse has seen a rise in marketing and strategy investments since Facebook rebranded to Meta in October 2021. For the crypto industry, the metaverse revolves around virtual land and gaming environments such as The Sandbox and Decentraland, whereas Zuckerberg's idea of the metaverse focuses primarily on VR-powered workspaces called "infinity offices" and isn't necessarily built on a public blockchain.

?An embassy was opened by Barbados in Decentraland in November 2021, and Warner Music Group (WMG) announced plans to build a theme park in The Sandbox in January 2022. As part of its plans to engage with sports, e-sports, and gaming fans in the future, HSBC purchased a plot of land at The Sandbox as well.

?In a metaverse where avatars interact with one another, there must be digital clothes for these avatars. NFT collectibles and fashion startup RTFKT, a company that also produces virtual sneakers, were acquired by footwear giant Nike (NKE) in December 2021. Though metaverse shopping malls are being built, mainstream adoption is still far from being complete. It is difficult to pinpoint a time or date for the metaverse to take off, but this decade is one of building and pioneering. This seems like a promising time for the industry, and it may be aggravated further as the world gradually moves towards digital.

Blockchain Companies and the Future of Institutional Investment Trends

In contrast to conventional financial instruments, blockchain technology allows institutions to operate much faster and cheaper, with a much lower error rate, lower resulting risks, and lower capital requirements. Several studies have concluded that blockchain represents a tangible innovation over many of the systems and processes used today, particularly in the financial services sector. Market structure and customer experience may be reshaped by blockchain over the long term as well, reshaping the global economic system. According to the PwC FinTechreport 2016, blockchain-related interest and investment have reached critical mass, and the technology has proven capable of bringing about a great deal of change. To this date, this has been proven to be true.

?Since the pandemic, consumers and institutional investors have become more interested in the crypto sector. The 4th Annual Global Crypto Hedge Fund Report 2022 by PWC reported assets under management (AUM) of crypto hedge funds surveyed rose by 8% to $4.1 billion in 2021. Although hedge funds are investing in crypto, they have a limited exposure, because approximately 57% of hedge funds investing in crypto hold less than 1% of total AUM. Investments in cryptocurrency are risky due to the high volatility of the sector. Market-neutral strategies are being adopted by hedge funds with cryptocurrencies, which use derivative products to mitigate risk and generate profit regardless of market direction.

?The impact of blockchain on various institutions is comparable to the impact of the Internet in 1995, transforming lives in a profound way and enabling a new way of interacting and collaborating. Security, regulation, and scalability are still open points in securing this emerging technology. Getting to the maturity stage and becoming mainstream may take some more time, but as we have seen with recent developments, that time may be sooner than later. This is especially true after the recent Ethereum Merge, which may attract even more institutional investments as it pledges to conserve energy and use environmentally-friendly means in relation to how blockchains work. The shift in staking methods is already being welcomed by some investors, whereas others are bound to follow as investment in innovative blockchain companies remains strong.?