After the approval of 11 spot Bitcoin ETFs by the U.S. Securities and Exchange Commission shortly after Bitcoin’s 15th “birthday” in January 2024, the digital asset industry experienced a long-awaited turning point. This marked the transition of digital assets from a niche curiosity among cypherpunks to an alternative asset class that gained significant attention from top asset management companies.
Now, the community is gearing up for another important milestone in the coming weeks – the fourth Bitcoin halving. Native to the cryptocurrency world, it is well-known that the previous three Bitcoin halvings largely followed a predictable pattern of intensified market activity leading to price rallies, followed by correction phases. While we can draw on past experiences to predict potential market reactions, I believe that the upcoming halving will be different from any previous ones for one key reason: institutional investors have entered the cryptocurrency market.
During this Bitcoin halving, private wealth, family offices, and large traditional financial institutions have strategically started incorporating digital assets into their portfolios and products. This marks a shift in the way the entire industry operates and implies that the aftermath of this halving will be different from all the previous ones.
From a mysterious niche field to professionally managed asset class
Each halving of Bitcoin over the past 15 years has marked a milestone in the development of digital assets. During the first halving in 2012, digital assets were still a mysterious niche field primarily driven by the technological curiosity and libertarian spirit of early adopters.
By the time of the second halving in 2016, mainstream awareness had significantly increased, to the extent that the world’s leading derivatives market, the Chicago Mercantile Exchange Group, launched a Bitcoin price index later that year, laying the foundation for institutional interest that was just beginning to emerge.
By the time of the third halving in 2020, the entire market landscape had undergone significant changes, and digital assets had won the hearts and wallets of retail investors. The widespread adoption of user-friendly investment platforms facilitated accessibility, which in turn drove a surge in mainstream investment market acceptance of digital assets.
However, as of 2020, most professional investors remained cautious about cryptocurrencies due to their uncertainties regarding the role of this asset class in a reliable investment portfolio and its legal status. Investors preparing to enter the cryptocurrency market quickly realized that the market lacked reliable exchanges, platforms, and custodial institutions that met the regulatory, operational, and security standards expected of professional trading counterparts. The demand for experienced institutional-grade trading counterparts in the digital asset space, especially in Asia, remained unmet. This was a key driving factor behind the launch of the DBS Digital Exchange by DBS Bank in December 2020. Other financial institutions followed suit after recognizing the market gap and also introduced digital asset platforms.
Everything changed in 2022 when the entire industry faced a massive trust crisis with the collapse of billion-dollar cryptocurrency exchanges and hedge funds. It is worth noting that the catalyst for these events was not the failure of blockchain technology but poor risk management and corporate governance. Investors realized that relying on unregulated platforms exposed their digital asset portfolios to significant operational and technological risks, in addition to managing a highly volatile asset class.
To mitigate these risks, investors began self-custodying their portfolios or transferring digital assets to trusted platforms – typically those that followed the regulatory rules of traditional financial institutions, especially in areas such as risk management, asset segregation, financial stability, and anti-money laundering. Regulatory authorities in major financial centers like Singapore also began imposing requirements for digital asset platforms to meet these standards.
Digital asset platforms, upon recognizing these structural changes, either adapted accordingly, moved to less stringent jurisdictions, or exited the market altogether. However, this did not sound the death knell for the industry; instead, the most severe crisis faced by digital assets led to a transformation into a professionally managed asset class.
Investors no longer on the sidelines
So, what can we expect from the fourth Bitcoin halving? Given that each halving marks a reduction in the newly minted Bitcoin supply, it is highly likely that we will see a period of strong buying demand as investors anticipate a rebound in Bitcoin, just like in the previous halvings. This has already begun, as the Bitcoin price recently broke previous all-time highs.
However, the unique aspect of this halving is that institutional investors, who were previously on the sidelines, have entered a more professionalized market after overcoming their past skepticism. We may also see market participation from asset management companies and funds, such as spot ETFs.
This trend has already started. A report by Glassnode shows that from 2020 to 2021, the Bitcoin supply held by large entities such as institutions, funds, custodians, and over-the-counter trading platforms increased by 13.4%, while the number of large entities holding Bitcoin increased by over 27%. Fast forward to 2023, the surge in institutionally-focused Bitcoin products (and the expectation of actual ETF approvals) could be attributed as one of the reasons for the rebound that began late last year. According to research by Coinshares, there was a $2.25 billion inflow into digital asset investment products in 2023, making it the third-highest year for such inflows since 2018.
Now is the opportune time for institutional investors to expand their market share. Unlike in previous halvings where the Bitcoin price corrected significantly within months after reaching new all-time highs, the selling pressure after this halving might be mitigated by this new investor composition.
With these new investors comes a heightened awareness of the risks posed by unlicensed and untested platforms. Therefore, this time, professional investors will place greater emphasis on partnering with trading platforms that have the proper qualifications, allowing them to focus on managing their portfolios without excessive concerns about operational and technological risks.
These qualifications include infrastructure such as bankruptcy isolation, regular independent audits, robust cybersecurity, tested risk management processes, and adequate liquidity protection.
Furthermore, as digital assets are increasingly adopted into alternative investment portfolios, platforms that seamlessly integrate with other financial services – such as the ability to manage traditional assets alongside digital assets or access tokenized investment opportunities – will have a competitive advantage over purely digital asset platforms.
The platform ecosystem in the market will inevitably evolve in this direction as professional investors are more willing to collaborate with such trading platforms. In conclusion, the fourth Bitcoin halving is expected to be a turning point in the transformation of the digital asset industry – establishing a mature, trusted, and professionally operated ecosystem.