Crypto Is Not so Different After All
Overview of crypto industry market value and its potential growth
In this second instalment of the Onchain Custodian webinar, James Gillingham, CEO, and co-founder of Finxflo, the first hybrid liquidity aggregator, tackles why cryptocurrencies are rapidly becoming a world-leading asset class that asset managers and family offices should consider. The total crypto market cap has reached 2.48 trillion dollars at one point from less than 1 trillion a few months ago and is now expected to grow at a compounded annual growth rate of 30% year on year, from 2021 to 2026. With traditional financial banks now also adopting cryptocurrency, companies, and finance firms putting bitcoin in their portfolio, crypto has become not so different from traditional asset classes because of the rapid institutionalisation that was first observed in 2020.
James has had a decade of experience in finance, including as executive director of JageroFX and as managing partner at Choice Investments before co-founding Finxflo, which has recently announced a partnership with Onchain Custodian to provide high-grade custody services to its customers.
With the crypto market currently in a period of sideways movement, this webinar by Onchain Custodian discusses how and why this market situation is the right moment for asset managers and family offices to reconsider crypto. This is significant especially if they’ve been on the fence before and were not attracted to the high price of market tokens in the first months of 2021. James shared his expertise on the current market trends, especially the activities involving the institutions entering the space.
A level playing field for institutional and retail investors
The increased regulatory clarity surrounding crypto has allowed a surge of interest from traditional finance market clients to participate in the crypto market. As Wall Street players such as Goldman Sachs, J.P. Morgan, and Wells Fargo announce their increasing offerings of cryptocurrencies, their participation further adds legitimacy to crypto as an individual asset class that can transform the global financial system going forward.
“Now that institutions are searching into the asset class, this is now bringing huge asset inflows with them,” James said, highlighting the bitcoin purchases of publicly-listed company MicroStrategy, and constant adding of Bitcoin by Grayscale, an investment institution, into its portfolio. “And they are doing this regardless of price levels,” the Finxflo co-founder added.
James emphasised its importance in his presentation; Institutional investors’ support above $30,000 may safeguard Bitcoin’s price rally and protect the portfolio of retail traders.
A tweet from Elon Musk that can single-handedly change investor sentiment and move markets can indeed send retail and institutional traders grappling with unique risk management solutions. Eliminating these types of market distortions is one of the many ways the industry can achieve a level playing field that is necessary for a full mainstream cryptocurrency adoption.
Digital Asset Management Solutions
While institutionalisation of the crypto market makes it no different from traditional finance, with the method of acquiring them becoming more and more accessible as well, James points to private key management as essential not just to gain access to crypto networks and sign transactions, but the component that must be safeguarded at all times. James likened it to a credit card pin number which any person should never give to anyone else.
“Something that’s very important for the private keys and the safekeeping is having essentially a custodian,” James said, as he advised against putting this in sticky notes. Digital assets function like a messaging system where the private key is like the email password. As such, the importance of keeping private keys absolutely secret and secure at all times cannot be overstated.
The most common solution is to have a hardware wallet to safeguard a person’s digital assets and private keys, but this often requires high technical proficiency and is not completely free of risks. On the other hand, entities with fiduciary duties are prohibited to keep bitcoins in their custody and required to engage licensed and regulated third-party custodians. This market solution has actually brought institutional liquidity in the market as a result. Since James’ company Finxflo deals with high volume trades by nature of it being an aggregator, a natural solution is to employ the use of custodial services. By partnering with Onchain Custodian, Finxflo is ensured with the security of their customer’s assets. Thus, crypto is still no different from traditional financial assets because there’s a certain level of responsibility to ensure that those assets are safe and secure, especially if those digital assets’ volume is quite significant.
Why custodians are critical to the widespread adoption of digital assets
James briefly touched on the demise of Mt. Gox as the key turning point in digital asset custody. Simply put, it made everyone realise that digital assets should be protected just as one would do for their traditional financial investments and funds. “On the back of that, I was looking for a way to make sure that my private keys are secure and safe,” James said, adding that today, with services like Onchain Custodian, safekeeping at a scale is totally possible.
With that, the tech community that is into crypto and the traditional banking and money transfer community, working in concert with regulators, somehow worked together to ensure the industry is more investor-friendly.
“It’s important to have the technology and the amalgamation for multiple different areas, all coming together and solidifying the entire industry and essentially protecting everybody,” James noted.
Digital custodians need to be trustworthy, accessible, and affordable. As the digital market continues to grow, safeguarding crypto assets will take on greater priority which is why we are now seeing a prominent rise of digital asset custodians. This is not different from how institutions and high-net-worth individuals safeguard their money. The core function of crypto custody solutions lies in the safekeeping of digital assets and custodians, have a critical role in instilling confidence in digital assets to continue to attract and maintain financial institutions and other investor groups.
The important innovations happening in the crypto ecosystem, particularly on the infrastructure surrounding digital asset custody, have made institutional players confident about the future of the industry. “Especially the larger institutions that are really really buying a lot, because they all see this as a fantastic buying opportunity,” James has observed. For asset managers, and family offices who are seeking to get cryptocurrency exposure today, James draws attention to the need to acquire more knowledge and awareness of its volatile nature before looking to build a broader portfolio of digital assets.
This webinar is around 37 minutes long but if you want to catch James’ lecture on specific points, we have provided a timestamp below.
OUTLINE:
00:00 — Introduction
05:12 — Traditional banks adopting to cryptocurrency
08:16 — Trader demand and institutionalisation
14:17 — Solutions to decentralised finance
22:50 — Standardisation around private keys and public keys
28:07 — Developments in custody solutions
