July 16, 2023

What Massive Inflow of New Capital Means for Current Crypto Markets

How does an influx of new capital in cryptocurrency markets affect institutional investors' accessibility? What changes does this surge bring to market liquidity? How is it reshaping public perception of Bitcoin and what impact does it have on other cryptocurrencies? This article seeks to answer these critical questions as we delve into the new dynamics introduced to the crypto landscape.
Man looking at charts

1. Improved Accessibility for Specific Parties

Many retirement accounts and other institutional investors have been unable to participate in the cryptocurrency market due to regulations. This means that a large section of potential investors could not partake in the crypto boom. However, with the recent influx of capital, these investors might now gain access to cryptocurrencies and other digital assets that were previously inaccessible. This is possible because regulatory bodies are likely to respond to this new wave of investment and provide more accessible options for these investors.

However, it’s important to note that having the option does not imply that every institutional investor will partake. Regulators and the industry as a whole will likely need to work together to implement appropriate safeguards and infrastructure for facilitating safe large-scale investments.

Similarly, it’s important to acknowledge that individuals might not feel comfortable with Bitcoin, even as a spot ETF. These clients might opt out of firms investing their capital in cryptocurrencies, choosing more traditional assets instead. Nonetheless, if institutions have started filing after years on the sidelines due to growing demand, they might be more receptive to the idea of investing in cryptocurrencies.

2. Decreased Liquidity on Exchanges

One of Bitcoin’s primary value propositions is its scarcity. Although the total number of Bitcoins will never exceed 21 million, the number available on exchanges is currently even less. When you account for lost Bitcoin and holders who are seemingly not selling anytime soon, the amount of BTC available on exchanges is a mere fraction of its potential. According to the popular YouTube Channel ‘Invest Answers’, the illiquid Bitcoin supply reached a record high of 72% in June. This implies that most Bitcoins are held by ‘HODLers’, not traders and exchanges.

The entry of large investors into the market will likely reduce liquidity, as these institutions do not trade Bitcoin daily. This could make it challenging for smaller or retail investors to enter and exit positions, as the markets might become less volatile due to the decreased liquidity. As the halving approaches, these investors are likely to hold, rather than trade, in anticipation of the typical frenzy that occurs when Bitcoin rewards are halved.

The inflow of new capital into the crypto space is a welcome development, as it might provide opportunities for those previously excluded from the markets. However, due to the decreased liquidity on exchanges, it could become more difficult for retail investors to seize these opportunities. Therefore, investors must consider the potential implications of this new capital influx before making any investment decisions.

3. Improved Overall Perception of Bitcoin

As more institutional investors enter the space, cryptocurrency markets will likely receive more mainstream attention. This could result in Bitcoin being seen less as a fringe cyberpunk movement and more as a widely accepted asset. With this newfound legitimacy, more people might feel comfortable investing in cryptocurrencies, perceiving them as backed by real money rather than just being digital assets. If ‘Smart Money’ validates Bitcoin, it is likely to be considered a sound investment, attracting more attention.

Furthermore, increased investment in cryptocurrencies might lead to greater innovation and adoption of blockchain-based technologies. This could result in disruptive applications that utilize blockchain, creating a new level of trust among participants in various industries. With more holders and acceptance of Bitcoin, applications built on the Bitcoin blockchain might begin to flourish, creating new use cases for the technology.

Although Bitcoin is a decentralized asset, public opinion still plays a vital role in its value. The influx of new capital could serve as a strong indication to other countries and investors that Bitcoin is here to stay, potentially encouraging more countries to accept cryptocurrencies as payment and influencing international financial policies to become more accommodating towards digital assets. With American institutions leading the charge, other countries might likely follow suit and join the cryptocurrency wave.

4. Implications for Other Cryptocurrencies

The emergence of Bitcoin ETFs could positively impact the entire crypto market, signaling to industry players and potential investors that cryptocurrency investments are becoming more mainstream. This could lead to an increase in capital for other digital assets such as Ethereum, Litecoin, or Monero. As these altcoins become better understood by the public, they might be seen as viable options for investors seeking to diversify their portfolios.

Moreover, with increased funds entering the space from institutional investors, projects backed by real use cases and sound fundamentals will likely continue to attract capital. With large sums being injected into the market, these projects could expand their reach and achieve mass adoption faster than ever before. This could lead to a more diverse market consisting of projects built on robust fundamentals, as opposed to speculative investments.

Although cryptocurrencies as a category might benefit from the news, it’s important to remember that recent announcements pertain to the filing of a Bitcoin Spot-ETF and not other digital assets. As such, investments in these new ETFs will likely focus exclusively on Bitcoin, with little to no attention on altcoins. Investors should be aware that the effects might be limited to Bitcoin, and other cryptocurrencies may not experience the same growth. Institutional investors might decide to wait for further regulatory clearance on altcoins before investing in them.