How mining can attract institutional investment into cryptocurrency
Institutions are becoming more interested in Bitcoin as an asset to hold in their treasury. However, not all kinds of investors have access to it. In these situations and with the proper knowledge, these actors can take advantage of different alternatives that allow them to gain exposure to Bitcoin without having to actually buy it.
What is an institutional investor?
As the name implies, an institutional investor is an organization that invests money on behalf of others, generally their clients. Examples include investment companies or mutual funds, pension funds, and insurance companies. These actors tend to be the largest operators in the market and the main force of supply and demand of a specific asset or security.
Investing is these organizations’ main activity and the way they sustain themselves. Hence, they count on extensive resources, qualified professionals, and specialized knowledge for reviewing different investment opportunities that may not be available to the general public. That is why the capital managed by institutions like these is referred to as “smart money.”
Institutional investors face much less protective regulations than retail investors but, as they manage other people’s money, they also have more responsibilities and obligations.
Crypto institutional investments, not as simple as it seems
As we said, institutional investors represent enormous amounts of capital, so it’s often celebrated when news comes out of an ETF for cryptocurrencies being filed or an investment company adding BTC to its portfolio. Mainly because of the positive impact that the sums these organizations manage have on prices.
However, it’s not that simple. Institutional investors can be companies, partnerships, mutual funds, and many other kinds of organizations, so it’s difficult to fit them into any particular category. This poses a challenge for regulators, who must consider all the many different ways institutional investors operate and interact with the capital markets. Fund administrators control and approve what percentage of a portfolio is invested in diverse asset classes for many of these.
On the other hand, as you may know, there’s still a lot of regulatory uncertainty surrounding Bitcoin and other cryptocurrencies in most countries. Unclear rules — or none at all — often discourage investors from acquiring the assets because they imply more significant risks.
Institutional investment companies’ decisions hardly depend on a single person, so for a fund to invest in Bitcoin, for example, you’d need all the people involved in the decision-making process to understand it clearly and be comfortable with the volatility. Fortunately, this is starting to become a reality, as you often see job postings for major investment companies looking for crypto professionals.
Even when investors educate themselves, accept the risks, and are ready to dive into crypto, they find limitations. You may have heard of many companies filing a Bitcoin or Ethereum ETF to the SEC, only to never hear from them again. ETFs, or exchange-traded funds, are a security that tracks an asset or commodity — in this case, BTC or ETH — which can be purchased or sold on a stock exchange. Indeed, regulatory uncertainty affects not only investors but the regulators themselves.
All of these reasons prevent many institutional investors from exploring the world of cryptocurrency. Luckily, there are different, less complicated ways to find exposure to cryptocurrencies without actually having to buy them.
Mining stocks, an alternative exposure to Bitcoin
Because of the nature of their activity, there are many public-traded companies whose stock tends to follow the price of Bitcoin. The most common case is mining companies.
Think about it: these organizations mine Bitcoin as their primary activity, they “earn” in Bitcoin, and their revenue depends significantly on its price. The more Bitcoin’s price surges, the more dollars they’ll earn, and thus, the more their company — and successively, their stock — will be worth.
Indeed, in the last week of July 2021, when Bitcoin started its recovery, many securities from Bitcoin miners followed, some of them even outperforming the most popular cryptocurrency.
Even more so, mining companies have seen significant growth since China’s mining ban — the ones that didn’t have to relocate, that is. The drop in hashrate and consequently in mining difficulty kickstarted one of Bitcoin’s most profitable epochs for mining in terms of cost and price.
The miner migration out of China allowed the other mining companies — North American in particular — to enjoy a pretty unique prosperity period. Furthermore, hashrate has started to recover, so profitability will probably slow down in the future. However, it will probably take months for the network to restore its hashrate completely. Until then, these mining companies will keep having a significant advantage over new miners and enjoying the benefits of a much less competitive landscape.
Understanding mining matters
Whenever you hear about Bitcoin in a conversation, the most popular talking points are privacy, financial freedom, or the maximum supply cap, which are all great Bitcoin features. Nevertheless, mining and proof-of-work don’t get the attention they deserve. On the contrary, they’re often criticized.
Truth is proof-of-work is still the most secure consensus algorithm we have today. It’s so well designed it’s practically impenetrable, and its incentives for honest behavior far outweigh the potential gains of exploiting it — if someone ever could. Not only is it so effective that entire enterprises and industries are surging around it, it is also creating a bridge between Wall Street and the current cryptocurrency regulatory limbo.
This is a win-win situation. With slightly above-average knowledge of crypto mining and its functioning, institutional investors can gain a good amount of exposure to crypto assets, even without buying them, avoiding a lot of headaches and procedures. In turn, the cryptocurrency industry enjoys significant inflows of “smart money” that mining companies can use to expand their operations further, boost their hashrate, and keep providing security to the Bitcoin network.
Moreover, with the protocol that Titan is building, mining companies could optimize the hashrate generated by these injections of capital into the industry, creating invaluable new opportunities.
Through the collaboration of institutional investors, mining companies, and a decentralized hashpower marketplace, the mining industry could see unprecedented growth. Not only can it offer all kinds of hashrate-based products. It can also onboard new people and actors, whether big or small, into an ecosystem that never seems to stop growing.
Titan is actively working to optimize mining and make proof-of-work cryptocurrencies more accessible and democratic. If you liked this story, make sure to subscribe to our blog and sign up for our weekly newsletter. You can also visit our social media through the links below. We’ll be glad to have you!
