This Bitcoin halving will be different — the institutions are here
In January 2024, shortly after Bitcoin’s 15th birthday, the digital asset industry welcomed a long-awaited milestone – the approval of 11 physically-backed Bitcoin ETFs by the U.S. Securities and Exchange Commission.
For many industry participants, this marked a shift from digital assets being a niche curiosity among cypherpunks to an alternative asset class that has garnered significant attention from top asset management companies.
Now, the community is preparing for another important milestone in the coming weeks – the fourth Bitcoin halving.
Cryptocurrency natives know that the previous three Bitcoin halvings largely followed a familiar pattern, with intensified market activity leading to price rallies, followed by correction phases.
While we can draw from past experiences to predict potential market reactions, I believe the upcoming halving will be different from any previous ones, and there is one key reason for that – institutional investors have entered the cryptocurrency market.
As Bitcoin undergoes its halving, private wealth, family offices, and large traditional financial institutions are strategically incorporating digital assets into their portfolios and products for the first time. This marks a shift in the way the entire industry operates and means that the aftermath of this halving will be different from all the previous ones.
From a mysterious niche to professionally managed asset class
Each of Bitcoin’s halvings over the past 15 years has been a milestone in the development of digital assets.
During the first halving in 2012, digital assets were still a mysterious niche, driven mainly by the technological curiosity and libertarian spirit of early adopters.
By the second halving in 2016, mainstream awareness had significantly increased, to the point where the leading derivatives market, the Chicago Mercantile Exchange Group (CME Group), launched a Bitcoin price index later that year, laying the foundation for institutional interest in the nascent asset.
By the third halving in 2020, the landscape had drastically changed, and digital assets had won the hearts and wallets of retail investors. The widespread availability 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, as they still had doubts about 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 lack of trustworthy exchanges, platforms, and custodians in the market meant that they couldn’t meet the regulatory, operational, and security standards expected by professional trading counterparts. The demand for experienced institutional-grade counterparties in the digital asset space, especially in Asia, remained unmet. This was a key driving factor behind the launch of DBS Digital Exchange by DBS Bank in December 2020. Other financial institutions followed suit after recognizing the market gap.
Everything changed in 2022 when the industry faced a massive trust crisis with the collapse of billion-dollar cryptocurrency exchanges and hedge funds. It’s worth noting that the trigger for these events was not the failure of blockchain technology, but rather poor risk management and corporate governance. Investors realized that relying on unregulated platforms would expose their digital asset portfolios to significant operational and technological risks, in addition to managing highly volatile asset classes.
To mitigate these risks, investors began self-custodying their portfolios or transferring digital assets to trusted platforms – typically those adhering to regulatory rules of traditional financial institutions, particularly in areas such as risk management, asset segregation, financial stability, and anti-money laundering. Regulatory bodies in major financial centers like Singapore also began imposing requirements on digital asset platforms to meet these standards.
Digital asset platforms, after recognizing these structural changes, either adapted accordingly, moved to less stringent jurisdictions, or exited the market altogether.
But instead of sounding the death knell for the industry, the severe crisis faced by digital assets led to a transformation into professionally managed asset classes.
Investors no longer wait and see
So, what can we expect from the fourth Bitcoin halving?
Given that each halving signifies a reduction in the newly mined Bitcoin supply, we are likely to see a period of strong buying demand in anticipation of a Bitcoin rally, similar to the previous halvings. This is already happening, with the Bitcoin price recently breaking previous all-time highs.
However, what sets this halving apart is that previously cautious institutional investors have entered a more professionalized market after overcoming past skepticism. We may also see market participation from asset management firms and funds, such as physically-backed ETFs.
This trend has already begun. A report from Glassnode shows that from 2020 to 2021, the supply of Bitcoin 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 of institutionally focused Bitcoin products (and anticipation of actual ETF approvals) starting late last year could be attributed to the influx of $2.25 billion into digital asset investment products, making it the third-largest year for such inflows since 2018, according to CoinShares’ research.
Now is the opportune time for institutional investors to expand their market share. Unlike previous halvings, where Bitcoin prices experienced significant corrections within months of reaching new all-time highs, the selling pressure after this halving may be mitigated due to this new investor composition.
With these new investors comes heightened awareness of the risks posed by unlicensed and untested platforms. Therefore, professional investors will place greater emphasis on partnering with trading platforms that possess the necessary qualifications, allowing them to focus on managing their portfolios without excessive concerns about operational and technological risks.
These qualifications include bankruptcy isolation, regular independent audits, strong cybersecurity, tested risk management processes, and sufficient liquidity protection, among other infrastructure.
Furthermore, as digital assets continue to be adopted into alternative investment portfolios, platforms that seamlessly integrate with other financial services – such as the ability to manage digital assets while managing traditional assets or accessing 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 become more willing to collaborate with such trading platforms. In summary, 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.