What will the Institutional Purchase of Cryptocurrencies in 2021 mean
Bitcoin hits a new record high of more than USD $61,000 with support from institutional investors
Bitcoin hits a new record high of more than USD $61,000 as stimulus hopes and big names fuel demand. According to PwC’s global crypto leader Henri Arslanian, this rally is partly driven by the entry of more institutional investors into the market. Large financial institutions like Paypal and Fidelity have made moves into the adoption of cryptocurrencies while the likes of Square and Microstrategy are paving ways and signalling the legitimate use of bitcoin as an alternative to cash as they do balance sheet investment into bitcoin.
These endorsements for the largest market cap coin, bitcoin, have since opened floodgates to much more institutional support as confidence surrounding the legitimacy of cryptocurrency is bolstered. In the following table, we can see that this situation is further validated by markets from across different entities.
Source: Ark Investment Management LLC, Big Idea 2021 Report
Back in 2017, a similar rally can be seen however, that was mostly backed by speculative retail inventors leaving volatility of the price of bitcoin high and drawing high inertia and scepticism from institutional inventors. However, coming to today, strong committed support from institutional investors are expected to dampen the price volatility of bitcoin.
Source: Regtank 2021, based on data from Google Trend and Yahoo Finance
From the chart above we see that recently, the increase in bitcoin price search on Google has been lower relative to the increase in the price of bitcoin compared to back in 2017. This further shows that this rally is one that is less speculative. With greater adoption of bitcoin, there will be a clear upward pressure on the price instead because the supply of bitcoin is limited.
The rally for bitcoin remains strong as we see Chinese beauty application, Meitu buying up $40 million worth of cryptocurrencies using its cash reserve. Besides Meitu, the launch of Goldman Sachs’ Cryptocurrency Trading desk has also further propelled the mainstream adoption of cryptocurrencies. We expect to see more listed companies having a bitcoin reserve in the near future.
Problems with security however still pose a challenge to the mainstream adoption of bitcoin. Scrutiny on Bitcoin is definitely going to be tight as cryptocurrency crimes become more sophisticated. In 2020 alone, at least 13% of all criminal proceeds in bitcoin passed through private wallets and has made it difficult to track cryptocurrency transactions.
To mitigate risks like fraud, operations and compliance that are commonly associated with cryptocurrencies, enterprise-grade compliance is necessary. AML enforcement in relation to digital onboarding and ongoing transaction monitoring is going to be vital to combat cryptocurrencies risk. Companies with treasury reserves in bitcoin or intending to receive cryptocurrencies as a form of payment need to be able to identify their source of cryptocurrencies and apply appropriate risk measures.
Companies can use Regtech providers to automate some of the compliance needs. To identify a credible provider, one will need to understand the quality of AML and CFT databases used so as to be able to understand how ongoing transactions can be tracked to detect any fraudulent transactions. We believe that the demand for Regtech services will continue to grow correspondingly with the cryptocurrencies market and enable stronger compliance in the virtual world.
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