In January 2024, shortly after Bitcoin’s 15th “birthday,” the digital asset industry experienced a long-awaited turning point – the approval of 11 spot Bitcoin ETFs by the U.S. Securities and Exchange Commission. For many industry participants, this marked the transition of digital assets from a niche curiosity among cypherpunks to an alternative asset class that garnered significant attention from top asset management firms. 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 similar pattern, with increased market activity leading to price rallies and subsequent corrections. While we can draw on past experiences to predict potential market reactions, I believe that the upcoming halving will be different from any before, and there is one key reason for this: 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 signifies that the aftermath of this halving will be different from all previous ones.
From a mysterious niche to professionally managed asset class
Each of Bitcoin’s previous halvings 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 primarily driven 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 at the time, the Chicago Mercantile Exchange Group (CME Group), launched a Bitcoin price index later that year, laying the foundation for institutional interest that was just beginning to emerge.
By the third halving in 2020, the overall 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 fueled a surge in mainstream investment market acceptance of digital assets.
However, as of 2020, most institutional investors remained on the sidelines regarding cryptocurrencies, as they still had doubts about the role of this asset class in a reliable investment portfolio and its legal status. Investors looking to enter the cryptocurrency market quickly realized that there was a lack of trustworthy exchanges, platforms, and custodians that met the regulatory, operational, and security standards expected by professional trading counterparties. 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 our launch of the DBS Digital Exchange in December 2020. Other financial institutions also followed suit by launching their own digital asset platforms.
Everything changed in 2022 when the industry faced a significant trust crisis as billion-dollar cryptocurrency exchanges and hedge funds collapsed. It is worth noting that the trigger for these events was not the failure of blockchain technology itself but poor risk management and corporate governance. Investors realized that relying on unregulated platforms would expose their digital asset portfolios to significant operational and technical 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 that adhere to regulatory rules followed by traditional financial institutions, especially in the areas of risk management, asset segregation, financial stability, and anti-money laundering. Regulatory agencies in major financial centers such as Singapore also began imposing requirements on 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 signal the death knell for the industry but rather led to the transformation of digital assets into professionally managed asset classes.
Investors no longer on the sidelines
So, what can we expect from the fourth Bitcoin halving? Given that each halving signifies a reduction in the newly mined supply of Bitcoin, we are likely to see a period of strong buying demand in anticipation of a Bitcoin rally, similar to previous halvings. This scenario has already begun, as the price of Bitcoin recently broke previous all-time highs.
However, what sets this halving apart 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 participation from asset management companies and funds, such as spot 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 in Bitcoin products targeted at institutions (as well as expectations of actual ETF approval) can be attributed as one of the reasons for the rebound that started late last year. According to research by Coinshares, 2023 saw $2.25 billion flowing into digital asset investment products, making it the third-highest year for such inflows since 2018.
Now is the opportune time for institutional investors to expand their share of participation in the market. Unlike previous halvings, where Bitcoin prices corrected significantly within months after reaching new all-time highs, the selling pressure after this halving may be mitigated due to the presence of these new investor types.
With the influence of these new investors comes a heightened awareness of the risks posed by unlicensed and untested platforms. Therefore, this time, institutional 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 technical risks.
These qualifications include infrastructure such as bankruptcy segregation, regular independent audits, robust cybersecurity, tested risk management processes, and sufficient 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 digital assets alongside traditional assets or access tokenized investment opportunities – will have a competitive advantage over purely digital asset platforms.
The market’s platform ecosystem will inevitably evolve in this direction as institutional investors become more willing to work 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.