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Rising Institutional Interest in Bitcoin and Potential Challenges

Bitcoin and other digital assets have always caught the attention of big investors. Recently, though, the approval of 11 US Bitcoin exchange-traded funds (ETFs) has piqued their interest even more.

David Lawant, the research lead at FalconX, a firm focusing on institutional crypto, told Cryptonews that the latest data shows a noticeable rise in institutions’ interest in digital assets.

According to Lawant, the discourse regarding institutional interest began to evolve starting mid-last year, when Blackrock filed for a spot Bitcoin ETF, and the approval started appearing increasingly likely. The exceptional performance of spot Bitcoin ETFs has further sparked this interest.

Lawant suggests that to understand how much large US institutional investors are adopting; one should look at how open interest compares with the basis. The basis is the difference between future and spot prices  you can see this comparison at the Chicago Mercantile Exchange (CME).

The CME secured the premier position in Bitcoin’s future open interest at the close of last year and has witnessed a consistent rise in its share ever since. Additionally, the CME basis remains high, predominantly for Bitcoin futures.

Institutional impact on Bitcoin’s meteoric rise

As Aleph Zero’s Co-Founder, Matthew Niemerg, explained to Cryptonews, Microstrategy’s decision to issue over $800 million in low-interest convertible notes to purchase Bitcoin provides further evidence of increasing institutional involvement in digital assets. This surge in institutional interest could also fuel the recent and unprecedented surge in Bitcoin’s price.

The rise in Bitcoin’s price, as evidenced by increased inflows, can indeed be attributed to this trend, according to Niemerg. He anticipates that the trend observed with tokens, commencing with Bitcoin, Ethereum, and finally inclusive of all other assets, will persist similarly.

According to Matt Ballensweig, the chief of BitGo’s digital asset settlement branch, Go Network, the growing value of Bitcoin could be due in part to support from Blackrock CEO Larry Fink.

Blackrock’s CEO Larry Fink and Fidelity have significantly boosted Bitcoin’s standing in institutional interests. They advocate for the digital asset’s positioning within diverse portfolios and offer a range of portfolio options for various risk thresholds, including a certain percentage of digital assets.

These endorsements have critically influenced asset allocations from hedge funds, pensions, endowments, and Registered Investment Advisors (RIAs), underscoring the potency of their impact.

Challenges in crypto adoption

Even though it’s clear that more and more institutions are showing interest in digital assets, experts caution that there are still significant challenges in the crypto industry that could slow down this adoption. For example, Niemerg highlighted security and compliance as the most important obstacles for institutions buying digital assets.

The DeFi network known as Unizen recently experienced a security breach, resulting in a nearly $2.1 million loss from user accounts. As reported by Cryptonews, the culprit used a loophole in an Ethereum-based contract to steal funds, which were then converted from USDT to DAI.

Niemerg suggests adding safety measures, insurance, and extra privacy options to DeFi’s foundation, which could reduce risks while maintaining flexibility. It might help keep institutions interested.

Niemerg also commented on the importance of having Know Your Customer and Anti-Money Laundering regulations at the protocol level.

As institutions start exploring Bitcoin, regulatory clarity is becoming crucial. Despite the approval of spot Bitcoin ETFs, other Bitcoin-related matters could cause future worries.

Jonathan Bander, the Chief of Tax Strategy at ExperityCPA, spoke to Cryptonews about how the potential introduction of wash sale rules in the crypto sector could significantly change the game for institutions.

Based on Bander’s insights, a potential new rule could make digital assets less attractive to buy, decrease their availability, and create more unpredictability in the market. It could pose problems for institutional and regular investors alike.