Even with the world in lockdown, the crypto space is a hive of activity.
The last few weeks in particular have seen a flurry of institutional activity that includes Nasdaq confirming plans to integrate with enterprise blockchain firm R3. Also, Grayscale, which manages more than $2.5 billion in digital currencies, recently declared that it saw a record increase in new institutional capital inflows to its digital currency investment products.
Most recently, venture capital firm, Andreessen Horowitz, announced that it had raised $515m for its second fund focused on crypto networks and businesses. The timing of this capital raise has raised a few eyebrows. What could be enticing institutions to infiltrate the crypto markets at a time when the global economy is entering a period of contraction, which the International Monetary Fund (IMF) predicts will be the worst since the Great Depression?
The institutions' ascendance in crypto has grown in parallel with innovation in the sector. The capital potential the likes of family offices, asset managers, pension funds and university endowments can bring to the table is spurring fin-tech firms to clean up their act.
In addition to giving much-needed legitimacy to the sector, this attempt to bring cryptocurrencies out of the obscure corners of the internet is providing a great deal of assurance to retail investors. These investors are reaping the benefits of the breakneck pace that tech firms are working to solve long-standing issues such as combating fraudulent activity and private key management.
Dramatic advancements in cryptography, such as MPC, now enable users to sign crypto transactions in a highly secure fashion, providing both retail and institutional investors with peace of mind in knowing that their cryptoassets are safe from a security standpoint.
Dmitry Tokarev, CEO at Copper, echoes that newfound confidence in the digital asset class can be partly ascribed to tech firms’ aspirations to court institutional investors into the space.
“Of course many retail investors have demanded more robust infrastructure to manage their assets efficiently and securely – but none louder than the institutions.”
The rapid development of tech infrastructure in the sector is reportedly now attracting the interest of even mutual funds and insurance funds, who embody some of the strictest investment constraints.
In the space of twelve years, the crypto industry – once dominated by scammers and deemed a currency for less than honourable dealings – has undergone a dramatic seismic shift. Many industry proponents point to recent headlines as evidence that Bitcoin has cemented a reputation as an established investment strategy.
Since the start of the year, the digital currency has gained more than 20%, touching $10,000 last week. Today, Bitcoin has over 18 million units in circulation, equivalent to more than $162bn (BTC is trading at $9,000 at press time). It is also one of the few asset classes that has restored its value following the March flash-crash.
Despite Bitcoin’s meteoric rise, cryptoassets still only represent a fraction of the world’s money and markets. Lack of regulation remains a major obstacle to the development of digital assets in financial services. As it stands, the legal context of cryptocurrency varies from jurisdiction to jurisdiction. While some governments classify cryptocurrency as a unit of account, others categorise it as a financial instrument.
With Bitcoin and altcoins rapidly gaining prominence globally, regulators are facing the unenviable, challenging task of striking the right balance in adequately regulating risks without impeding digital currency innovation.
Jeff Hancock, Co-Founder and CEO at Coinpass Global, believes that greater regulatory clarity is needed for crypto to develop further on an upward trajectory.
He commented: “The industry’s rapid development indicates that crypto is not only here to stay, but it will one day become a vital part of the overall payments and financial services ecosystem. Therefore, it’s essential that regulators step up in providing adequate regulatory oversight.”
Tokarev echoes that greater regulation may benefit the industry in the long run. He commented: “What may seem to be a regulatory overkill at first sight, tighter regulation would likely cause crypto to mature in the long-term in enabling more institutional players to enter the market and to increase their stake in the space.”
Compliance has always been an area of major concern in the crypto industry. Recent developments in the space indicate that exchanges are feeling the pressure to ramp up ID verification processes and meet compliance obligations with robust KYC/AML.
The cryptocurrency and blockchain space has evolved uninterrupted by regulators and legislation for the first decade of its existence. Interest in the crypto-asset space from retail investors, professional traders and institutions has been increasing daily. As crypto and blockchain markets mature, KYC/AML should no longer be seen as a burden to entry, but a way to bring safety and security to the space for all participants. With increased oversight on the “end-point” or “gateway” services that connect traditional finance to the crypto-asset space, the rest of the decentralized eco-system can continue to develop and thrive.
For decades, institutional investors have relied on deep pools of data and sophisticated analytic tools to drive investment decisions. A key concern for those managing large investment portfolios is the difficult task of conducting fundamental analysis on crypto projects. Even though blockchain technology is renowned for its transparency, there are multiple considerations and different ways to read and glean information from every available dataset on the blockchain.
For institutional investors, comprehensive research and analysis is vital before allocating capital to any project. Retail traders on the other hand typically shy away from conducting fundamental analysis. However, as the market matures, it is conceivable that metrics will play a much larger role in trading decision making and more individual investors will look to add fundamental analysis to their arsenal of skills.
At a time when central banks are printing more money to prop up flagging economies, Bitcoin and altcoins are drawing increased interest from institutional players, many of whom are publicly backing cryptocurrency as a safeguard against inflation. The participation of institutional investors in the crypto space, however small it may be, is profoundly strengthening the market and ought to be celebrated and promoted.
With the Bitcoin blockchain undergoing its third block reward halving on 11 May and adding more fuel to the excitement, it is likely that in the coming months, more traditional institutions will be flocking towards the world’s largest cryptocurrency.
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