Why Institutions Are Buying Bitcoin
The rise of Bitcoin is monumental as it grew from its early days to a decentralized payment system that surprised the world with its huge market capitalization. Bitcoin was made in its decentralized nature to give power to the people. However, with its growth came institutionalization with large corporations and financial institutions investing in cryptocurrency. Below, we will explore why institutions are buying Bitcoin. Let’s begin.
Asset tokenization
The global financial system has resulted in a mass influx of institutional investors into Bitcoin. This is because the next step in the cryptocurrency space is real-world asset tokenization. These large institutions are preparing for asset tokenization by tapping into ETFs. Earlier this year, this was achieved when Bitcoin ETFs were approved and many investors tapped into them. Tokenization is a process where asset rights are converted into digital tokens on a blockchain. The process offers the promise of improved transparency, liquidity, and digitalized physical assets efficiency.
The dynamics of supply
When Bitcoin was introduced, there was only ever going to be 21 million mined Bitcoin. The amount of mined Bitcoin reduces every four years due to an event called the halving. On April 20th, 2024, the mining amount was reduced from 6.25 to 3.125. This means that there is increased pressure on the supply of Bitcoin compared to 2020. This can push up the price of Bitcoin due to a tight supply.
Transparency
Bitcoin transactions are all recorded on a public ledger referred to as blockchain. The implication of this is that any person can view past or currency transactions at any time. This transparency offers several benefits for institutional investors.
One of them is that every piece of money is accounted for, so it cannot be embezzled or stolen without being identified. This also makes it very easy to comply with anti-money laundering regulations. For accounting purposes, institutions and large investors can track their transactions and holdings. Lastly, Bitcoin’s transparency also helps build trust among institutional investors. This is because many of them are usually hesitant about investing in assets without transparency.
Cryptocurrency market growth
The increased participation of individuals and the growth of the cryptocurrency market are aiding Bitcoin’s adoption. Though Bitcoin is volatile, the total market capitalization of the coin increased to $1.7 trillion in 2022. Currently, it has a market cap of 1.2 trillion. With such growth, many large institutions are attracted to buy Bitcoin. These investors are those with large capital, such as money managers, hedge funds, and institutions.
Additionally, the growing adoption can also be attributed to an increase in the use of cryptocurrency exchanges that provide custody services and trading tools. These trading exchanges serve the needs of institutional investors and increase adoption. This combination propels the cryptocurrency market forward and makes Bitcoin a more mainstream investment option.
Inflation hedge
Bitcoin is perceived by many to be a hedge against inflation. This has resulted in an increase in institutions’ interest in the token. Bitcoins past performance has further increased its credibility as a refuge from the tendencies of central banks. Bitcoin is not like the central bank’s controlled currencies that are regulated, so it isn’t prone to inflation. Its limited supply, which doesn’t affect its price, is a key factor in why many consider it an inflation hedge. This is why too many Bitcoins symbolize freedom, transactional freedom, just like freedom of speech.
Traceability
Blockchain technology is still growing, however, its impact can be felt in many industries around the world. Perhaps, the impact is more prominent in the finance world. This is evident in the recent increase in blockchain-based projects by financial institutions. A major place where blockchain is showing immense impact is in its traceability.
In the world of traditional finance, traceability is the ability to track a financial asset movement. However, this information is usually manually tracked and is quite exhausting, expensive, and time-consuming. With blockchain’s distributed ledger, individuals can track an asset in real-time at a reduced cost than in traditional finance.
This traceability is aiding in an increased institutional interest in Bitcoin and other cryptocurrencies. Blockchain, through its reduced settlement time and traceability, has made it easier for institutional investors to partake in trading Bitcoin and other cryptocurrencies. This has resulted in a legitimization of Bitcoin and other cryptocurrencies in the eyes of mainstream investors and traders.
Conclusion
The increase in institutional adoption of Bitcoin and other cryptocurrencies is seen by many as positive news for the cryptocurrency market. It shows that there is an increased recognition of Bitcoin and other cryptocurrencies as people are willing to invest in it. As the institutional adoption of Bitcoin grows there will be more stability for the coin leading to more adoption of the coin.