Following moves by firms like Tesla, Visa, and Mastercard, to incorporate Bitcoin into their payments infrastructure, institutional banks appear to be getting in on the act. This marks the beginning of a new era for Bitcoin – a distinct shift away from a cryptocurrency driven by retail investors to one with more mainstream adoption.

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Institutions are getting in on the act

BNY Mellon, the oldest bank in the US, has announced that it will create a Digital Assets Unit, allowing the firm to provide custody services for Bitcoin and other digital currencies in response to ‘growing client demand for digital assets’. Anthony Scaramucci’s Sky Bridge Capital has pumped almost $500m into Bitcoin over the past 5 months. Furthermore, Morgan Stanley is weighing up whether to bet on it and JP Morgan will look at offering Bitcoin trading if there is client demand.

Why buy Bitcoin?

Both banks and large companies are interested in Bitcoin for good reason – aside from the hype. In an era of zero percent interest rates, money kept on companies’ balance sheets is doing nothing for them.

Bitcoin can provide a much better source of return if companies want to diversify their holdings, this is even more relevant given the high levels of liquidity we are seeing. Investors may also see this as an opportunity for huge returns, as it has proved over the last year.

However, Bitcoin may not be used as a substitute for fiat, nor as a speculative asset. Rather, cryptocurrency may increasingly be used as a defensive asset to hedge against inflation and forex volatility, essentially making it digital gold. However, unlike gold, Bitcoin will still not have any tangible value and therefore its price will always be derived from the size and strength of network effects.

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The institutional effect

In the long run, institutional investors could help to stabilize the price of Bitcoin. However, their entry into the market could pump up the price significantly in the shorter term for two main reasons. The first is that banks are likely to engage in much larger trades than individuals, moving millions of dollars rather than thousands, putting additional upward pressure on the price.

The second is the network effect that these institutions will have on the crypto. Big institutions will both legitimise Bitcoin, in lieu of government control, and enhance the size of the network, which is the key factor propping up the price.

Whatever happens with Bitcoin, it is clear that its adoption by large institutions will have a sizeable effect not only on its price, but on the way that it is used and treated by companies and individuals alike.