Goldman Sachs recently released the eleventh edition of its annual global insurance report survey, which provides valuable insights from investment and financial officers about the macroeconomic environment and return expectations. The survey polled 328 decision-makers, representing over half of the $26 trillion global insurance businesses. The report included cryptocurrency for the first time.
According to the survey, 6% of the respondents said they were either investing in or considering cryptocurrency. Although this percentage would seem low and insignificant to some, I believe it represents a significant milestone for the crypto market and that insurance will play a pivotal role in its foreseeable future. Here’s why.
One of the least discussed aspects of insurance companies is that they are big investors. They typically invest premiums in the economy in pursuit of returns. Also, they are generally long-term-minded when investing. According to a European Central Bank (ECB) report on financial stability, euro area insurers had roughly €10 trillion in investment assets as of the first quarter of 2020. By comparison, pension funds, which are one of the most recognized investors, had about €2.5 trillion in investment assets in the same period. This goes to prove that insurance companies are more important to the stability of capital markets than you think.
As a result of these large holdings, any move that insurers make in an attempt to reallocate funds or liquidate their portfolios can potentially destabilize markets and affect asset prices immensely. Therefore, the large investment efforts made by insurers can bring price stability to assets in financial markets as they are less likely than many other investors to liquidate their positions in turbulent market times.
What has this got to do with crypto, you may ask? The crypto market has evolved since the original idea of just having a new type of money, which was bitcoin. These days, the ideas being discussed revolve around the establishment of a financial system that runs parallel to the traditional financial system (TradFi). In essence, a market with its credit system, investment assets, and financial products can cater to both corporate and consumer needs, just as it’s the case in TradFi. The only difference is that the new parallel financial system is decentralized, running independently of any central authority. That’s what decentralized finance (Defi) is about. And just as in TradFi, Defi needs market stability to reach the holy grail of mainstream adoption.
Insurance Institutions’ Large-Scale Investing Can Improve Crypto Market Stability
To understand how insurance companies can bring improved stability to crypto, it helps to first understand the biggest driver of volatility in the market—namely, “the whales.” Whales are the large-scale holders of crypto assets. They generally own up to 44% of the market.
These big guys are not long-term investors. Most of the price movements and market volatilities happen as a result of the high-volume trading done by whales, as they attempt to profit from the relative thinness of the market. UK news outlet The Telegraph quoted David Gerard, author of Attack of the 50 Foot Blockchain and a known crypto-skeptic, as saying: “The big players can easily move the price.” Because the bitcoin trading market is very thin, “any one of them could crash it,” he said.
The crypto market is currently in turmoil and there is no shortage of stories explaining the causes. Earlier this week, CNBC reported the fall in the price of bitcoin as a result of investors’ selling off “risky assets,” including bitcoin, ether, and other crypto assets. Indeed, every market is susceptible to the actions of traders. However, the presence of long-term institutional investors acts as a buffer, something that the crypto market lacks at the moment.
That’s why I believe that increased crypto interest from insurance companies bodes well for the future of crypto. We need more involvement from insurance companies to provide an improved buffer against the actions of short-termers. Also, the involvement of insurance companies also takes us closer to the future where premiums become available for crypto assets and related businesses.