Exploring the Power of Blockchain: A Guide for Institutional Investors
Explore the power of blockchain: A guide for institutional investors
Introduction: Institutional investors have shown increasing interest in digital assets over the past few years. This is a major shift from early adopters, primarily individual investors. A survey found that 58% of institutional investor reported investing in digital assets in 2022. This is up from 36% in 2010. This article will explore the increasing appeal of digital assets. It will also provide an overview and give insights on how institutional investors should approach this changing market.
Digital Assets are attractive to institutional investors for a variety of reasons. The respondents to the survey cited the following factors as the main reasons for their interest: the high potential upside (43%), innovative technology (41%), decentralization potential (29%), absence of government interference (26%), lack of correlation between the asset and other traditional investments (25%) Investors are most interested in the potential returns of these assets and their decentralized nature.
Understanding Digital Assets. Digital assets are commodities online that can be purchased, sold and traded. Their value is derived from ownership rights or usage rights. Blockchain technology is the foundation for these assets. It's a digital public database that stores data in immutable blocks linked together into an unchangeable chain. This is a simplified description of how blockchain technology works:
- Transaction Entry: A new block is created when someone initiates a particular transaction, like sending Bitcoin to a friend.
- Peer-to peer transmission: The block will be sent to a global network of computers that are connected in a peer-to peers.
- Validation: The transaction can be validated using either the Proof of Work (PoW), or Proof of Stake (PoS), process.
- PoW: A computer network solves an equation complex to validate a transaction. This requires significant processing power and energy consumption.
- PoS: Participants "stake" or contribute their own cryptocurrency in order to validate the transaction. This results in a significantly lower energy usage compared to PoW.
- Block Addition: The new block will be permanently added to the chain if approved. After a block has been added, it is nearly impossible to change it because it requires consensus from the majority (51% of computers) in the network.
The rise in trading volume: Originally created to support Bitcoin, the blockchain technology is now used to power thousands digital assets. The cryptocurrency market has seen a dramatic increase in trading volumes and liquidity. You can, for example:
- The volume of cryptocurrency exchanged on the spot market
- Dec 2019: $40 billion
- Dec 2020: $386 billion
- Dec 2021 : $1 trillion
- Dec 2022: $358 billion
The average monthly volume of trading in 2022 is eleven times greater than the average volume in 2019. The surge in trading activity is a sign of the increasing acceptance and integration into mainstream financial systems of cryptocurrencies.
Categorizing digital assets: Digital assets include a wide range of products and services that go beyond just cryptocurrencies. They can be divided into four major classes:
Digital Currencies: These assets are native blockchains, and they primarily facilitate value transfer. Bitcoin is an example of this type.
Blockchain Infrastructure: This category includes assets that facilitate the development, interoperability and growth of blockchain technology. Ethereum's smart contract features are a good example of this category.
Digital Asset Applications (DAA): These are assets that are native on-chain apps, which provide services or products specific to blockchain users. Uniswap is a decentralized exchange platform that serves as an illustration of a digital assets application.
- On-Chain derivatives: Assets that are based or derive value from a different asset or group. This category is exemplified by Tether, which is a stable coin that's pegged to fiat currency.
Investors can make informed decisions by understanding the primary uses of each asset within these categories.
The increasing interest among institutional investors in digital assets is a reflection of the changing landscape of financial markets. Digital assets are attracting the attention of investors who want to diversify portfolios and take advantage of new opportunities. They do this because they offer high returns and have a decentralized nature. It is important for institutional investors to understand the basics of blockchain technology, as well as the different types of digital assets. This will help them navigate this dynamic space. Institutional investors can take advantage of the benefits digital assets have to offer by staying informed and taking a strategic approach.