Institutional Adoption Of Crypto Is Gaining Momentum
Here Is What Would Push Institutional Involvement In Crypto Into Overdrive.
For a long time, institutional investors have been reluctant to deal with crypto and prefer just to observe. The major turn-offs for them were crazy risks going in one package alongside crypto, as well as the wild nature of the whole market itself. All this was completely incompatible with the white gloves style of work that the institutions got used to.
As time went on, the crypto chaos started to display more traits of the civilized investment environment. The more the market matured, and the closer to a trillion bucks capitalization, the more painful it was for the institutions to stay uninvolved and miss out on high-dollar opportunities.
Instead of dwelling on the barriers and deal breakers, the investors switched to brainstorming the ways to get along with crypto. The pandemic years have seen a significant rise in institutional interest and their cash inflow in digital assets.
Let’s take an overview of what’s changed and where things are heading next.
Why are more institutions investing in crypto now?
First, let’s look at the numbers.
The Institutional Investor Digital Assets Study conducted by Fidelity Digital Assets (Fidelity Survey) shows that European investors are increasingly putting their money into digital assets. The number of institutional investors allocated to these types of investments increased by 11 percentage points from 45% in 2020, reaching 56% in 2021.
The U.S. also saw a continued acceleration in growth, with a six percentage point increase from the 2020 survey to 33%.
When it comes to Asia, this region has always been at the forefront of crypto adoption. Now 71% percent surveyed Asian institutional investors have already invested in digital assets, and that number continues to grow as well!
So does it mark the start of massive institutional crypto adoption? Well, at least, there are many good reasons for that:
(a) The high potential upside of crypto and better portfolio diversification
According to Coinmarketcap, by November 2021, the global cryptocurrency market was a few steps away from hitting $3 trillion capitalization. Here is the proof:
Blue-chip cryptocurrencies, like BTC and ETH, have displayed their best performance — their value has increased by 460 percent and 1,812 percent, respectively, since Jan 1, 2020.
Given all this, institutions just could no longer let go of high-ROI investment opportunities.
More than half of surveyed institutions by Fidelity cited strong capital growth of their portfolios and admitted that digital assets had shown more attractive diversification benefits when compared to mainstream asset classes.
(b) Hedging capabilities against inflation and economic policy uncertainties
In its report of April 2021, the cryptocurrency exchange Coinbase noted that it hosted $335 billion trades for the 1st quarter of 2021, $215B worth of which was traded by 8k+ institutional investors. One of the key drivers behind this institutional cash influx is attributed to inflation hedge purposes.
JP Morgan even named BTC as the new inflation hedge that beats the gold.
What is more, some studies even find BTC as a “strong hedge and safe haven” against some economic policy uncertainties, including fiscal policy, taxes, national security, and trade policy under bullish market conditions.
You can learn more about BTC hedging capabilities by checking out the tremendous analytical paper “Does Bitcoin Hedge Categorical Economic Uncertainty? A Quantile Analysis”.
(c) Progress in addressing crypto regulatory ambiguity
There is no such thing as a global regulatory standard for institutional investing in crypto. Actually, there shouldn’t be, as every country has its own legal system, along with its specific take on how to treat investments in digital assets. Thus, the level of clarity of crypto regulation varies from country to country.
At the same time, it’s no secret that some countries, like the US or Europe, have a great deal of influence in regulating the crypto field. Roughly, if let’s say the US SEC (i.e Security Exchange Commission) greenlights something in this field — so would many other countries, with a high probability. When the SEC gives its blessing, it will be seen as an official seal of approval for institutions to take the next step in digital assets investing.
It’s a matter of question — what institutions are afraid of the most about crypto: its security risks or the threat of an unpredictable regulatory watchdog’s punishment?
So here are the major regulatory blessing signals that have allowed institutions to dare for crypto engagement:
- The US SEC’s approval of Bitcoin futures ETF. The same took place in Australia and France; and
- The proposal of Regulation of Markets in Crypto-assets (MiCA) which could potentially harmonize digital asset regulation across Europe and ultimately make the market more accessible for institutions.
It’s worth noticing that certain countries in Europe, such as Switzerland, Luxembourg, and Malta, have already developed solid progressive frameworks enabling greater institutional involvement in crypto.
With all these factors, institutions now expect greater regulation than an outright ban on digital assets. Let’s keep watching how this plays out.
What crypto are institutions buying?
There are several ways institutions prefer to invest in crypto. Among those are
- direct purchase of digital assets,
- investment products holding particular digital assets (ETPs/ETFs/ETPs), and
- crypto derivatives (futures, options, and different crypto structured products).
Regardless of the type of investment, the dominating underlying assets are BTC, ETH, and Cardano, according to Coinshare.
Among other winners are Solana, Polkadot, and XRP.
What are still the barriers to institutional crypto adoption?
Among the most significant hurdles are:
(i) Lack of knowledge and absence of relevant value appreciation framework
The lack of a clear and solid valuation framework for digital assets is causing investors much frustration. The attempts to extrapolate the frameworks for traditional market assets are pretty questionable and may lead investors to inappropriate conclusions.
According to various surveys, crypto price volatility remains one of the greatest barriers to investment. Even though there are some instruments on the market that allow hedging crypto volatility risk (like options and futures), they still do not solve the problem to the fullest.
(iii) Uncertainty of regulation
Despite all the progress in regulation that’s been mentioned above, legal uncertainty is still an ongoing problem for institutions. Global regulators keep showing little consistency in keeping up with blockchain technology to allow innovation while minimizing risks for investors and the financial system. The lack of clarity surrounding the definition and treatment for crypto still keeps big institutional money at bay.
(iv) Crypto liquidity fragmentation
Currently, there are over 200 blockchains in the crypto industry, featuring over 6,000 cryptocurrencies and tokens. Crypto liquidity is scattered across a large number of centralized and decentralized exchanges (CEXs and DEXs), which causes much pain for institutional traders.
Due to shallow liquidity on exchanges, institutional investors that often want to make a USD X-million position cannot make the trades without distorting markets by creating substantial price swings. Therefore the sale of large holdings can take much longer than on traditional exchanges, where trades are executed in seconds or milliseconds.
What can be fixed now to speed up institutional crypto adoption?
Ok, now that we know the barriers, let’s figure out how they can be eliminated. Indeed those barriers are significant but not fatal.
While it’s hard to make some bets about the regulatory landscape — regulators are always distant from the economy and fail to keep up with it, other problems can be fixed in the foreseeable future.
A deeper understanding of crypto and the fundamentals of its valuation will come with time and practice, as well as with the accumulation of knowledge and expertise that is already actively happening in crypto communities.
Crypto volatility will be managed by engineering a variety of new structured investment products, providing investors with better risk/reward ratios.
Cross-chain P2P Trading resolves liquidity fragmentation.
The problem of crypto liquidity fragmentation and the whole market infrastructure can be solved with an innovative solution that will put all its scattered pieces into one puzzle and offer to an end-user a one-shop stop trading environment, aggregating crypto liquidity from all crypto exchanges in one place.
Yellow Network is an example of that kind of solution.
Particularly Yellow Network offers to interconnect multiple scattered exchanges in one automated non-custodial trading hub, providing a user with the aggregated liquidity and price feed, as well as seamless high-speed cross-chain transactions at minimal fees. Such a hub will provide institutional traders with all the benefits that come along in traditional markets: deep order books, low spreads, and the ability to match large orders without slippage and destabilizing assets’ prices.
Once institutions get the same level of comfort with crypto trading, their adoption rate will skyrocket.
Wrapping it up, mass adoption of cryptocurrencies by financial institutions is already a question of time, rather than whether it would even happen. The trend has begun, and it’s already too late to turn back.
Institutions’ potential for massive capital allocation will take the crypto market to new heights, turning it into a more professional and lucrative environment. In the end, it will mean a tremendous pivotal point of the evolution of the Web3 economy.