One of the largest institutional holders of Bitcoin is Grayscale with a total $AuM (Assets Under Management) of $797m at the close of 2018 down from a high of 2.8Bln.

From that data your first thought might be that institutions are withdrawing their Bitcoin holdings — however, you need to factor in the price decrease. The number of Bitcoins owned in the Bitcoin Investment Trust (owned by Grayscale) has been growing over the same period, up to over 200,000 Bitcoins.

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The Bottom Line To Institutional Investors In Bitcoin

The end of 2018 brought with it a wave of institutional news from NYSE-affiliated Bakkt launching custodial and trading infrastructure, through to up-for-approval Bitcoin ETFs and large 401k retirement plan service providers such as Fidelity opening crypto trading desks. In 2019 we have seen some delays, and even more movement in the space.

While the majority of crypto enthusiasts and investors are enthusiastic at the notion of positive price appreciation associated with the increase in institutional investment and convenience for large scale investors. There are a few things we need to talk about that are separate from price but I think are extremely important.

Let’s talk about the three biggest benefits that come with decentralisation and that Bitcoin and a number of other cryptocurrencies have pioneered.

1. Censorship resistance

2. Trustless transactions

3. Verifiable history

Arguably, all cryptocurrencies looking to drive the ecosystem forward will contain varying degrees of decentralisation but still maintain these three attributes. But when we look at what is happening in the institutional world are we set to lose the entire purpose that the ecosystem was founded on?

Censorship Resistance

The bottom line to censorship resistance is that there is no single point of failure and no single authority that could censor your transactions and inhibit them from reaching the ledger. Talking about Bitcoin, nodes can go down, but more exist to fill their place, removing the central point of failure. Thanks also to the decentralised consensus mechanism any single entity that could censor your transactions is also removed.

We have already seen the problems when operating through a centralised source (basically a bank), for example, an exchange. When that single platform fails, there is a hack, something goes wrong the user loses their access to the network. If they operated without that centralised figure, there would have been nothing to fail.

And to the second point, just look at Grayscales investment criteria to see censorship at work. If you do not meet the list of criteria, or fail to even after investing that central authority can block or limit your account.

Trustless Transactions

This is extremely basic. You should not, and do not need, to trust a central custodian, user, or anyone at all to initiate and complete transactions on the Bitcoin network. If you hold your private keys, you are 100% in control.

The problem with Bakkt, Fidelity, Grayscale and Coinbase is that they are moving institutional money into “custodial services” to decrease the initial friction for investors. But that comes a dire cost further down the line. That is how one single institution (Grayscale) can hold 205,000 Bitcoin, and this is just the beginning.

Verifiable History

Traditionally a Bitcoin user was able to securely verify the entire history of transactions which led to the current state of balances on that ledger.

The problem is that now large sums of money are taken “off the grid” in custodial vaults. The transactions inside those vaults are only on paper, through their own centralised system and databases. The movement of Bitcoin while it has been moved into the vault is completely unknown.

This creates a regression from a real public ledger to a collection of private databases where the transactions between owners are not verifiable or even knowable at all.

Conclusion

Like anything, there are two sides to this argument. The argument for potential price increases, at the cost of the core underlying principles that gave rise to the initial movement.

I think it is fair to say that there is still a benefit to cryptocurrency, say, that it is free of government intervention etc — but who do you think really controls the majority of these centralized institutional figures?

Institutional involvement also comes with its positives, usually increased ease of use, adoption, and security. One instance would be the centralised “but hopefully reliable” USDC stablecoin.

The biggest question for me becomes; how much can institutions swing the monopoly. There are a lot of players in this game (we haven’t even talked about miners here) that will be battling for control, yet as a market, currently, dominated by a global community of investors it will be our decisions that inevitable shape what happens next. How far will we let this go? We will have to see, but the allure of a higher Bitcoin price currently seems to be the prevailing battle cry.