Why Is Institutional Adoption of Crypto on the Rise?

From an outside perspective, you may wonder why financial institutions are rushing to support crypto payments and related financial services. You also may be curious about the infrastructures and regulations they’re following to accommodate this new shift in modern commerce.In this guide, we’ll cover the reasons why financial institutions are adopting crypto and which investors are leading the way.

Reasons Why Financial Institutions Are Adopting Crypto

Financial institutions that have embraced crypto are enjoying numerous advantages, and here’s what’s leading to this widespread adoption:

Increasing Regulatory Clarity

When crypto was in its initial stages, it was difficult for investors to navigate the market. Now, governments are making their stances clear about cryptocurrencies. Some countries, like Japan and Switzerland, fully support cryptocurrencies and blockchain technology. On the other hand, many countries in Europe and North America have accepted cryptocurrency but are beginning to enact regulations. Other countries, including Saudi Arabia and China, have banned cryptocurrencies and penalized participating investors in their respective countries. In fact, only a few countries have identified crypto as legal tender. El Salvador is one — they’ve launched their own Bitcoin wallet, encouraged their citizens to use Bitcoin, and required businesses to accept these digital assets. Today, there are very few countries that don’t have a stance on the crypto market, whether positive or negative. Countries with clear crypto regulations give investors guidance to avoid legal consequences in the long run.

Improved Infrastructure

The crypto ecosystem relies on modern blockchain technology to thrive. Significant infrastructural developments in the crypto industry include:

• Crypto custody: This refers to the process of storing cryptocurrencies and crypto assets. The decentralized finance (DeFi) technology that falls under crypto custody includes both hot and cold wallets. Hot wallets are digital and hold crypto assets over a remote server. Cold wallets exist as hardware and keep your assets secured offline.
• White-label crypto services: Many businesses recognize the need to implement crypto in their models. However, not every company has the expertise or tools to make this integration happen. Thus, white-label service providers offer turnkey solutions, like crypto exchanges and wallets, to allow businesses to accept payments and cater to traders.
• Crypto exchanges: Crypto exchanges work just like stock exchanges. They allow people to buy and sell digital currencies like Bitcoin (BTC) and Ethereum (ETH). Some exchanges even work with liquidity partners (LPs) who serve as marker makers in order to combat market volatility.
• Digital assets: New digital assets, such as Non-fungible tokens (NFTs), stablecoins, and cryptocurrency exchange-traded funds (ETFs) have become popular investing routes.

Each of these developments shows that the industry will continue to grow for the foreseeable future. As such, many financial institutions are embracing this modern financial system and making plans to adapt.

Growing Recognition of Crypto as an Asset Class

Cryptocurrencies are increasingly recognized as a legitimate asset class by traditional investors. Since cryptocurrencies have outperformed other asset classes in recent years, such as stocks and bonds, more investors are starting to flock to the cryptocurrency market. Major investment institutions have filed applications throughout 2023 for spot ETFs — and have won a major court case — to make crypto a more accessible asset class.

Potential To Diversify Portfolios

Perhaps one of the greatest benefits of cryptocurrencies is that investors can use them to diversify their portfolios. This is because cryptocurrencies are not correlated with other asset classes, such as stocks and bonds.Diversification is one of the principles of successful investing, but it can become difficult if you’re putting money into similar assets. For example, an investor may face financial uncertainty if they’ve invested heavily in stocks and real estate before a massive recession. Since the government controls the supply of fiat currency, investors could face challenges if they put too much of their money into traditional assets. Cryptocurrencies offer a viable alternative. While the crypto market does constantly fluctuate, its institutional future isn’t determined by any government. Rather, it’s largely impacted by regulations and legislation. This prospect may be a more comfortable reality for new and experienced investors.

Potential To Generate Alpha

Some institutional investors believe that cryptocurrencies have the potential to generate alpha, which is excess returns over the market. This is because cryptocurrencies are a new and growing asset class with a lot of potential upside.Many of these investors are counting on the crypto market to eventually become a bear market, encouraging more buyers to participate.

Examples of Institutional Investors That Have Adopted Crypto

Millions of businesses are already implementing crypto. However, the following companies are leading the way in crypto adoption with their massive investments.

MicroStrategy

MicroStrategy is a business intelligence and software company that has invested over $2 billion in Bitcoin. MicroStrategy curates a wide range of articles, news reports, research papers, education resources, and interviews about Bitcoin. They’re one of the most outspoken American companies about the development of blockchain technology and the advancement of the crypto market.

BNY Mellon

In 2021, BNY Mellon became one of the oldest institutions to focus on crypto — and they haven’t looked back.The bank has consistently expanded services, surveyed its customers about interest in crypto, and prioritized infrastructure improvements to make digital assets an option. That includes launching a digital asset custody platform in 2022.

HSBC

HSBC, or the Hong Kong and Shanghai Banking Corporation, is one of the largest financial institutions in the world, with trillions in assets and a substantial international footprint. The bank is based in London but for years has offered customers in Hong Kong the ability to trade digital assets, but now is also developing custody services. These developments, coming from Europe’s largest bank, show that large financial institutions are continuing to invest in crypto.

BlackRock

BlackRock is the world's largest asset manager, with over $10 trillion in assets under management. The company has announced that it is open to investing in cryptocurrencies on behalf of its clients.This news is shaping a new precedent of hedge funds being open to investing in cryptocurrencies. Successful asset managers are notorious for being overprotective of their clients' investments. So the more they venture into crypto, the more other financial firms will follow suit.

Fidelity

Fidelity is one of the world’s most popular brokerage firms. Recently, they’ve ventured into creating a crypto exchange. The project is known as EDX, and it’s even backed by Charles Schwab and Citadel. Fidelity's efforts to promote institutional adoption of crypto are significant because they show that a major financial institution is taking digital assets seriously. This could help to pave the way for other crypto businesses to join the fray.

Reflecting on the Institutional Crypto Movement

Overall, many businesses are embracing the financial inclusion of cryptocurrencies. In doing so, they are appealing to a worldwide audience of investors. To join the movement and implement crypto for your business, you’ll need the right technology to make it happen. AlphaPoint can help. We provide financial infrastructure including white-label crypto solutions, such as a turnkey crypto exchange, wallets, and liquidity solutions, to help you get the most out of crypto. Book a demo today to test our technology for yourself.