The Growth of Institutional Demand for Crypto

Author: John Hyatt

The institutionalization of crypto has been ongoing for years, but it has accelerated the last twelve months. We’re seeing more sophisticated investors, established financial institutions and social media platforms engaging with the crypto space, each with its own set of objectives and technologies.

This wave of institutional interest presents a golden opportunity for crypto companies. Understanding how sophisticated actors are interacting with and participating in the decentralization movement will inform the success of crypto service providers.

In a recent Bar on the Block webinar, several Ditto clients joined Patrick Lowry, CEO of Iconic Holding, to discuss these themes. These executives and entrepreneurs are working directly with institutions to help to usher in a wave of mainstream adoption:

• Diogo Monica, President of Anchorage, an institutional custodian and infrastructure provider
• Catherine Coley, CEO of Binance.US, an exchange for U.S. crypto traders and funds
• Hugo Renaudin, CEO of LGO Markets, a Bitcoin spot exchange for institutions
• Danny Kim, Head of Growth at SFOX, a crypto prime dealer for institutions and funds

These professionals are passionate about cryptocurrency and blockchain’s potential to create a fairer financial system. They believe institutions are vital to that mission, and they’re living out this mission through their work. Here are the 3 biggest takeaways from the webinar:

Nowadays in crypto, “institutions” means many things

The crypto industry often talks about “the institutions” getting involved in crypto. The problem, however, is that this catch-all term doesn’t do justice to the diversity of investors and organizations involved in crypto.

“When you talk about traditional institutional investors in the crypto space, it’s a bit like talking about the Loch Ness Monster,” said Hugo Renaudin, CEO of LGO. “Everybody knows about it, everybody thinks they’ve seen it, but actually nobody quite knows” what all the institutions look like and how they operate.

Proving that point, the speakers pointed to different types of investor profiles using their platforms: LGO caters to market makers; Binance.US to professional traders and funds who trade daily; SFOX is home to arbitrage funds and day-traders; and Anchorage has expanded from VCs and hedge funds to family offices and large corporates.

The panelists’ wide range of institutional clients reflects the maturation of the crypto and blockchain space. Gone are the days when “institutions” simply meant rinky-dink trading shops with a few million dollars. Today, a wide range of sophisticated incumbents and non-financial institutions are exploring investment ideas and use cases for crypto and blockchain.

The obstacles for mainstream adoption are still many

Institutional enthusiasm for crypto is, however, tempered by the various barriers and hurdles preventing them from fully diving into the ecosystem.

For example, Danny Kim of SFOX pointed to issues around crypto’s plumbing and underlying infrastructure. Institutions are accustomed to working on tech stacks they know and trust; the distributed technology underlying crypto assets can seem alien, and often is incompatible with an institution’s in-house capabilities and/or existing service providers. Often, the shock-value of decentralized networks is a deterrent in and of itself.

In a similar vein, Hugo of LGO described UX as a major pain point for institutions. It’s one thing to be a traditional financial institution that wants to trade bitcoin; it’s another to actually be completing blockchain transactions on a daily basis. Stablecoins, says Hugo, are a good first taste for institutions looking to get into crypto.

Catherine of Binance.US offered a different point of view, observing that the crypto investment world is already quite mature and ready for institutional adoption. Catherine pointed to the fact that institutional investors’ quest for yield took a turn when the equities bull run ended in March, and that market uncertainty since then has increased the value proposition of crypto investing for institutions and funds.

Diogo of Anchorage spoke to the elephant in the room: regulatory hurdles. The complexity and uncertainty of regulatory issues across jurisdictions continues to serve as the major barrier to greater institutional adoption, says Diogo.

Finance and technology incumbents have a role to play

In the last few years, a number of established corporations have sought to enter the crypto space: Facebook, Intercontinental Exchange, Fidelity, and J.P. Morgan to name just a few. According to the panelists, the crypto industry should welcome these incumbents.

“Everyone in this space is encouraging adoption. To do that, you need distribution, and incumbents can do that,” commented Danny of SFOX. “Part of our job is to educate institutions on how the digital asset space is evolving. We’re in the trenches and can help them out.”

Diogo from Anchorage sounded a similar note. “We want institutions to come into the space,” he said, then making the point that welcoming new entrants is simply part and parcel of blockchain protocols. “You can’t raise barriers of entry because blockchains are public.”

For Hugo of LGO, welcoming incumbents is a matter of growing the entire pie. “We want the space to grow, and incumbents can help us,” he says. But at the same time, Hugo harbors no illusions that incumbents may turn into competitors. “At the end of the day, those with the best products will win. We should welcome the competition.”

Catherine of Binance.US spoke to the diverging mindsets between crypto startups and financial institutions: “There’s a psychological component we need to be conscious of. We are fundamentally trying to rewire the financial system.” But Catherine also echoed her fellow panelists in welcoming greater involvement from incumbents. “If we’re here to hold onto turf and say ‘we’re here first’, we need to change our mindset. We can’t be boxing people out.”

“The crypto industry is almost unrecognizable compared to what it was as recent as two years ago”, said Patrick of Iconic. “The maturity levels of the professionals and companies building in the space, such as those I had the pleasure of hosting on Iconic’s Bar on the Block, is a testament to the impassioned development of the ecosystem as we work together to drive the institutional adoption of crypto.”