Skeptical at first, large traditional financial institutions are now amassing very large quantities of cryptocurrencies, bitcoin first and foremost. Likewise, several large players now want to add bitcoin ETFs to their range of offerings. In a severe inflationary context, bitcoin increasingly appears as a kind of digital gold, a safe haven. The growing appetite of traditional finance players for cryptocurrencies despite their high volatility certainly promotes credibility and adoption. However, we must fear the concentration of cryptos among institutional investors. Indeed, these large companies, “Big Money” are capable of buying or selling several hundred million dollars of cryptocurrencies in one go. They can therefore, in a single transaction, shake the crypto market, change trends and distort predictions. The way things are going, will the crypto market still be decentralized?
The appetite of institutional investors for cryptocurrencies
Have you ever heard of Big Money? Otherwise, take a look at Wall Street. You’ll see all these big, multi-million dollar companies that can move the price of assets in a single transaction. Since the bitcoin halving of May 2020 and the effects of the coronavirus pandemic on interest rates, Big Money has become increasingly interested in bitcoin.
Even when its price fell from $65,000 in April 2021 to $30,000 in July, institutional demand remained strong. And while crypto adoption is a common cause in the crypto space, the involvement of institutional investors in the crypto market is increasingly important. Several reports indicate that more and more institutional investors are allocating a portion of their portfolios to digital assets.
Most of those who have not yet done so plan to do so in the near future and believe that cryptos should be part of their diversification strategy. Thus, at the end of 2020, asset management institutions had invested nearly 15 billion dollars in cryptocurrencies.
Large institutional investors with direct or indirect exposure to bitcoin include Grayscale, BlackRock, Goldman Sachs, JPMorgan, Morgan Stanley, Tesla, MicroStrategy Inc., etc.
Obviously, seeing these big players investing in cryptocurrencies is very positive. This strengthens the legitimacy of cryptocurrencies and contributes to the increase in the value of crypto assets. However, knowing the power of whales in the market, the threat of centralization of cryptocurrencies should not be ruled out.
The impact of Big Money on decentralization
Despite the dynamism and legitimacy that Big Money offers to the crypto market, its involvement could represent a risk for decentralization. Indeed, decentralization presupposes the absence of trusted third parties and centralizing authority. The crypto user must be the only one to hold their private keys and have control over their assets. If this founding principle is altered, cryptocurrencies lose their foundation.
Obviously, when we stick to the software architecture that underpins crypto technology, decentralization will remain unwavering. A priori, no third party or central authority will ever be necessary for the issuance of cryptocurrencies or for the validation of crypto transactions.
However, decentralization could be seriously jeopardized if a group of investors manages to monopolize the Bitcoin network. In such a scenario, the price of cryptocurrencies could be manipulated according to the desires of a few institutional investors owning huge quantities of these currencies.
These actors could attempt to cause artificial increases or decreases in the value of cryptocurrencies to make significant profits when selling or buying. This is one of the major vulnerabilities of Bitcoin and other cryptocurrencies. To better understand the magnitude of the risk associated with a monopoly on the Bitcoin network, let’s look at some real-world examples.
The SpaceX case
Until very recently, Elon Musk’s company SpaceX was one of the largest holders of bitcoin. Imagine that it took a rumor about SpaceX selling 75% of its bitcoin holdings for the bitcoin market to experience a notable decline. The event occurred in August this year.
The parent cryptocurrency, which was then making a comeback, suddenly saw its upward trend slow down. Its price quickly went from $30,000 to $25,000. In turn, this drop caused the liquidation of over $1 billion in positions in less than 24 hours. Several other cryptos, including ether, saw their prices drop drastically in the process.
The BlackRock case
You’ve probably heard about BlackRock’s spot Bitcoin ETF application process. This approach caused the explosion in the value of bitcoin. For the record, BlackRock is one of the large asset management companies with exposure to cryptos.
The company manages nearly $9.5 trillion in assets. According to Glassnode, the approval of its bitcoin spot ETF application could trigger the entry of $150 billion into the bitcoin market.
Big Money and cryptocurrencies: how to protect decentralization?
Regulation appears to be the only effective shield against the growing influence of Big Money on the crypto market. With their financial power, large financial institutions can easily finance crypto projects and promote associated services. As a result, they have the potential to exert a major influence on the ecosystem of products and services linked to cryptocurrencies.
In the medium term, it is not excluded that institutional investors and large banks will assume majority control over the cryptocurrency market. Given their growing involvement in this sector, this possibility deserves to be taken seriously. If this were to happen, we would witness a paradox: the cryptocurrency market, initially designed as an alternative to the traditional financial system, would find itself under the control of the same dominant players.
Faced with this prospect, it is imperative that the cryptocurrency community and exchanges take steps to prevent excessive centralization. Although the idea may seem antithetical to the founding principles of cryptography, the development of internal regulations may be necessary. This regulation would aim to prevent an excessive concentration of cryptocurrencies in the hands of a limited number of investors.
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