The first half of 2021 was one of the most active periods on record for cryptocurrency, ushering in new all-time highs in asset prices, user adoption and trading activity. On the heels of a breakout in the second half of 2020, cryptocurrency cemented its place in the mainstream of the financial and technology sectors.
It’s not surprising then that the mainstreaming of digital assets has led to mass adoption of cryptocurrency among institutional investors. Investment in cryptocurrency accelerated in the first half of the year, with cryptocurrency exchange platform Coinbase seeing pronounced growth in institutional investors who transacted in record size, executing nine- and 10-figure trades in large-cap cryptocurrency assets via its Prime Broker.
Coinbase’s institutional business now has over 9,000 institutions with about $92 billion in assets on the platform. Meanwhile, trading volume in the exchange’s institutional business was $317 billion in Q2, an increase of 47% from Q1; Institutional volume comprised 69% of Coinbase’s total trading volume, up from 64% in Q1.
Coinbase has also formed partnerships with industry leaders including Elon Musk, PNC Bank, SpaceX, Tesla, Third Point LLC and WisdomTree Investments. What this points to is the degree to which institutional adoption of cryptocurrency has led many organizations to prioritize innovation in digital assets to capitalize on greater opportunities.
To be sure, cryptocurrency has seen continued price volatility—total market capitalization began the year at $769 billion, peaked at $2.4 trillion in May and ended the period at $1.4 trillion, registering a net gain of 86% at the end of the second quarter. But with Bitcoin (BTC) now a mainstay of long-term portfolios for many institutional clients, these investors appear to be more nimble and sophisticated in capitalizing on opportunities in the cryptocurrency space.
When looking at the increased nimbleness with which institutions approach their cryptocurrency portfolio, one way it manifests itself is in how they use Coinbase Prime, an advanced trading platform that also allows users to manage their cryptocurrency assets in one place. When institutional investors first entered the market, Coinbase Prime was utilized as a platform to mainly just buy, sell and store crypto; Now they are also using Coinbase Prime for financing, staking and data and analytics to optimize their trading activity in the cryptocurrency market.
Having a fully integrated platform that serves as a one-stop shop makes it easier for investors to seamlessly onboard into the cryptocurrency market for the first time. Which gets at one of the keys to why there has been mass adoption of cryptocurrency by institutional investors: Not only has the performance and resilience of Bitcoin convinced market participants of the overall long-term viability of cryptocurrency, but investing in it has also simply gotten easier.
As the cryptocurrency market has matured, it now has the service provider stack in place for professional investors. For institutions who are making the leap from traditional finance to the cryptocurrency space for the first time, they are increasingly able to plug and play with their existing operational setup.
The growing demand for engagement with the digital asset class from clients has meant that many wealth managers, banks and brokers now have to provide products and access to the cryptocurrency market. This is why Coinbase continues to see growth from these segments of service providers who are seeking to onboard clients through a robust platform, which includes a custodial solution that is regulated by the New York State Department of Financial Services.
Coinbase Prime continues to build out its infrastructure in order to serve the evolving needs of institutional investors beyond just buying, selling and storing digital assets. For instance, Coinbase Prime now offers staking infrastructure as a service for proof of stake assets; market and on-chain data analytics; and support for hundreds of assets including major decentralized finance (DeFi) tokens.
And as a multi-venue algorithmic brokerage in an agency model, Coinbase puts major liquidity venues in competition for an investor’s trade. In fact, Coinbase Prime regularly executes order sizes exceeding $1 billion for large-cap assets.
Not only has the performance and resilience of Bitcoin convinced market participants of the overall long-term viability of cryptocurrency, but investing in it has also simply gotten easier.
Bitcoin, of course, remains a big draw for institutions: According to data from Buy Bitcoin Worldwide, about $40.1 billion in Bitcoin is currently held by 14 Bitcoin fund issuers and asset managers, representing 4% of cryptocurrency supply. In total, about 6% of Bitcoin’s circulating supply has been accumulated by asset managers and companies.
But as institutional investors seek out new services and solutions through Coinbase Prime, the evolution of institutions’ involvement in the digital asset space can be seen in the fundamental approach they’re taking to their cryptocurrency portfolios: For example, 75% of Coinbase Institutional’s hedge fund clients now own more than BTC; of that group, 75% own Ethereum (ETH) and 50% own at least five different cryptocurrencies.
Coinbase’s clients aren’t just looking to expand their cryptocurrency asset allocations; they are also looking to participate directly through staking and access to DeFi. The next evolution of the marketplace will likely include deepening institutional participation in derivatives, futures, options, swaps, structured products and engagement in the rapid development of the non-fungible token (NFT) world.
We will continue to innovate our scaled solution that integrates every part of the cryptocurrency value chain into a single platform, and we monitor the performance of all the venues on which we trade to protect clients from counterparty and operational risks in cryptocurrency via true intermediation.
The frontier of cryptocurrency is changing at a breakneck pace, showing no signs of slowing down. And as the onboarding process into the digital asset market has become much more seamless, we look forward to facilitating access to new and emerging opportunities for institutions.