How the Recent Bitcoin Crash Is Affecting Institutional Investors

The price of Bitcoin has long been noted for its extreme volatility, seeing massive increases and decreases over relatively short periods of time. This volatility has been on full display in 2024, with the Bitcoin price crashing from all time highs of over $70,000 earlier in the year to lows of $48,000.

Such volatility can be challenging for individual investors, with the most recent crash just the latest example of how Bitcoin’s volatility can wipe out massive amounts of wealth in a single day. However, such incidents are also increasingly a reflection of institutional investors’ decisions to invest in Bitcoin or other cryptocurrencies on behalf of their clients.

In reality, the most recent Bitcoin crash provides an indicator of cryptocurrency’s increasing connectedness to the market as a whole and its increased acceptance among institutional investors.

Breaking Down the Recent Crash

In early August, an interest rate hike in Japan and fears of a recession in the United States led to a dramatic market downturn that affected both traditional indices like the Dow Jones Industrial Average, as well as cryptocurrencies.

Bitcoin dropped roughly 15% in value in just a single day.

As Marta Khomyn explained in an analysis for The Conversation, the fact that Bitcoin experienced a sharp drop in value alongside the rest of the market can be partly attributed to institutional investors’ increased presence in the space:

“Recent research has found that investors’ risk appetite, as well as interest rates and the idiosyncratic demand for crypto are three key factors driving crypto prices. […] And the risk appetite factor may be becoming more pronounced, with Bitcoin more plugged into the traditional financial system after the launch of multiple Bitcoin ‘exchange-traded funds’ (ETFs). As more and more institutional investors come to hold Bitcoin through instruments like ETFs, we could see crypto and other assets “co-move” – move together – more.”

In line with this, Bitcoin’s pricing also seems to reflect positive market sentiment, with a late August return to the $60,000 level partly attributed to market-wide expectations that the Fed would cut interest rates in September. Once again, Bitcoin prices tracked overall investing trends, highlighting the increased role that institutional investors are playing in this area.

Factors Influencing Institutional Investors

The recent crash is just the latest in a saga that has seen many institutional investors embrace Bitcoin and cryptocurrency as a viable addition to their portfolios, while others increasingly push against it.

For example, an analysis from AlphaPoint highlights that banks are using cryptocurrency to create new sources of revenue, improve existing products, increase their market share with younger consumers, enhance security and implement quicker transactions. At the same time, however, the decentralized nature and volatility of cryptocurrency can create challenges for centralized banks, while changing regulations and increased legislative scrutiny also introduces liabilities and risks for banks.

Despite the challenges, a survey by EY-Parthenon determined that institutional investors “are staying the course and are not moving away from crypto/digital assets, but are approaching their investments carefully with educated, tempered optimism. Institutions overwhelmingly believe in the long-term benefits of crypto/digital assets, and their abundance of caution stems primarily from concerns regarding regulatory uncertainty, identification of trusted institutions to partner with, and the need to ensure security and safe custody of this novel asset class.”

The survey’s findings also noted that the majority of institutional investors allocate less than five percent of their portfolio to Bitcoin and other digital assets. While Bitcoin is increasingly accepted, it is still a small piece of the overall investing puzzle — though a piece where institutional investors have planned to scale over time.

This long-term approach with scaled investments is considered a key driver in Bitcoin’s 2024 pre-crash gains. While the recent crash likely spooked some institutional investors, its rapid recovery (similar to the rest of the market) is a clear indicator that many institutional investors are continuing to include Bitcoin in their portfolio.

However, these events have changed the perspectives of many — Bitcoin is no longer an investment that is immune to other market events. It can be influenced just as easily (and sometimes even more strongly), a clear indicator of its gradual shift to a more institutionalized and connected asset class.

Part of a Diversified Strategy

As Bitcoin and other cryptocurrencies become increasingly enmeshed with market trends as a whole — even with pushback from some institutional investors — it appears poised to behave more like a “traditional” investment. This could lead to increased stability overall, but with the side effect of making Bitcoin more influenced by the performance of other asset classes.

While it is true that Bitcoin remains much more volatile than other investment options, its growing alignment with broader market trends will likely make it even more attractive to the majority of institutional investors as part of their investing strategy. While many will undoubtedly continue to avoid crypto investments, if anything, Bitcoin’s recent crash (and subsequent recovery) are even more of an indicator that it will continue to be a force among institutional and individual investors alike.