In January 2024, shortly after Bitcoin’s 15th birthday, the digital asset industry reached an eagerly anticipated milestone – the approval of 11 spot Bitcoin ETFs by the U.S. Securities and Exchange Commission. This marked a shift from digital assets being a niche curiosity among cypherpunks to becoming an alternative asset class that has garnered 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. Crypto natives know that the previous three halvings largely followed a pattern of increased market activity leading to price rallies, followed by a correction phase. While we can draw on past experiences to predict potential market reactions, I believe this upcoming halving will be different from any before it, 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 investment portfolios and products for the first time. This marks a shift in the way the entire industry operates and also means that the aftermath of this halving will be different from all previous ones.
From a mysterious niche field to professionally managed asset class, each of Bitcoin’s previous halvings marked a milestone in the development of digital assets. During the first halving in 2012, digital assets were still a mysterious niche field driven primarily by the tech curiosity and libertarian spirit of early adopters. By the second halving in 2016, mainstream awareness had significantly increased, to the point where the Chicago Mercantile Exchange Group (CME Group), the world’s leading derivatives marketplace at the time, launched a Bitcoin price index later that year, laying the groundwork for institutional interest that was just beginning to emerge.
By the third halving in 2020, the entire market landscape had undergone significant changes, with digital assets winning 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 concerns about their role in a reliable investment portfolio and their legal status. Investors preparing 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 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 the DBS Digital Exchange by DBS Bank in December 2020, and other financial institutions followed suit by launching digital asset platforms.
Everything changed in 2022 when the industry encountered a significant trust crisis with the collapse of billion-dollar cryptocurrency exchanges and hedge funds. Notably, the trigger for these events was not a failure of blockchain technology but rather poor risk management and corporate governance. Investors realized that, in addition to managing highly volatile asset classes, relying on unregulated platforms exposed their digital asset investment portfolios to significant operational and technical risks.
To mitigate these risks, investors began self-custodying their portfolios or moving their digital assets to trusted platforms, typically those that adhered to regulatory rules followed by 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.
Once digital asset platforms recognized these structural changes, they either adjusted accordingly or moved to jurisdictions with less stringent requirements or exited the market entirely. However, rather than signaling the death knell for the industry, the most severe crisis faced by digital assets led to a shift towards professionally managed asset classes.
So, what can we expect from the fourth Bitcoin halving? Given that each halving signifies a decrease in the newly mined supply of Bitcoin, we are likely to see a period of strong buying demand in anticipation of Bitcoin’s rebound, similar to the previous halvings. This has already begun, as the price of Bitcoin recently broke previous all-time highs.
However, what makes this halving different is that professional investors, who were previously cautious, have entered a more professionalized market after overcoming past skepticism. We may also see market participation from asset management companies and funds, such as spot ETFs. This trend has already started, with a report from Glassnode showing that from 2020 to 2021, the Bitcoin supply held by large entities such as institutions, funds, custodians, and over-the-counter platforms increased by 13.4%, and the number of large entities holding Bitcoin increased by over 27%. Fast forward to 2023, and the surge in institutionally-focused Bitcoin products (as well as the expectation of actual ETF approvals) can be seen as one of the reasons for the rebound that began late last year. According to Coinshares’ research, there was $2.25 billion inflow into digital asset investment products in 2023, making it the third-largest year for such inflows since 2018.
Now is the opportune time for professional investors to expand their share of participation in the market. Unlike previous halvings where there was a significant sell-off pressure in the months following Bitcoin’s all-time high, this time the sell-off pressure may be mitigated due to this new investor composition.
With these new investors bringing their capital, they will also bring a heightened awareness of the risks posed by unlicensed and untested platforms. Therefore, this time, professional investors will place greater emphasis on collaborating 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 isolation, regular independent audits, robust cybersecurity, tested risk management processes, and sufficient protection of liquidity.
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 platform ecosystem in the market will inevitably evolve in this direction as professional investors become 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.