By Darren Parkin
by Oliver Linch, CEO of Bittrex Global
The recent market downturn has been a key focus for both institutional and retail customers deeply immersed in the cryptosphere. However, despite the current ‘crypto winter’,institutional interest in cryptocurrencies is stronger than ever across the board, including in trading, investment in projects, and M&A activity.
Almost every major bank now has a substantive crypto desk, and there are very fewasset managers who aren’t including crypto as part of their portfolios. Even those that have historically been more reluctant are now getting involved because their customers are demanding it. As such, crypto is now not only of interest to speculative investors; institutional banks have also started to see the importance of getting involved.
There are many drivers for this. Firstly, as sophisticated market participants look more closely into crypto and apply analytical tools and market knowledge to the sector, they are increasingly realising that the new technology provides the potential for a significant new investment suite of products. As knowledge increases, so does interest in investment.
Secondly, given the parlous state of traditional markets, institutions are forced to look elsewhere for investments. Interestingly, this crypto bear market is not countercyclical to traditional markets (as historically they have been) – nevertheless, diversity of investments and alternative products continue to be of interest to institutions looking for a safe – or at least an interesting – place to put their customers’ money.
Finally, the increasingly competitive and cut-throat financial sector means that being cast as “out of date” is a death sentence for banks and investment managers alike. A certain amount of crypto enthusiasm is effectively mandatory nowadays, lest they be seen in the market as being left behind.
In many ways, the crypto landscape of today is vastly different from 2021, yet it continues to gain traction as time passes, against all the odds.
As attitudes towards digital assets transition, it is inevitable that individuals will be drawn to crypto as an alternative investment model rather than solely focusing on traditional investment practices. As such, the most innovative banks have got ahead of the curve, and institutional interest isstronger than ever before. In line with this narrative, one of Japan’s largest investment banks, Nomura Holdings, is launching a new venture capital unit that will specifically focus on digital assets, while asset management giant BlackRock has announced the launch of multiple crypto ETFs for its institutional clients.
While banks have started to realise the true value of cryptocurrencies, initial scepticism has cost them some time, and they are quickly trying to to catch up. Traditional methods of investment and antiquated banking systems have dominated financial systems for centuries, limiting the link between crypto and mainstream finance, but the remarkable growth of crypto means it now has an important place in the financial system.
Institutions are either entering or further expanding into the space by developing their own digital asset strategies in an innovative bid to bridge the two worlds together. In addition,Nasdaq, the second-largest US stock market operator, recently announced that it will start a crypto custody service to benefit from the demand it has witnessed from institutional crypto investors. This is just another example of the crypto space working its way into the global financial system.
However, the two main blockers for such institutional investment are clear. The first is product availability and information. Institutions are looking to carry across the sophisticated trading strategies that have been tried and tested in traditional markets for years.
Derivatives traders are crying out for the crypto sector to innovate and get more sophisticated, allowing them to apply TradFi models to crypto products. We are constantly working closely with traders, asset managers, and other market participants to help push the technology that exists today to expand beyond the current offerings and give these investors access to the products they are looking for, whether that’s on the exchange or OTC.
The second is regulation. Like-for-like comparisons between TradFi and crypto products require crypto to be regulated to the same standards as the equities, bonds, and structured products that institutional investors are used to. Institutional investors are increasingly becoming frustrated with exchanges that claim to be “regulated”, only to find that the jurisdiction selected lacks one or more of these key tenets.
Naturally, as we weather the bear market, scrutiny surrounding crypto has increased, and this scrutiny is integral to crypto’s long term success. It is especially important that outsiders, as well as those immersed in the industry, critically look at what we are doing to ensure the best and safest outcome for everyone. In the same vein, discussions surrounding regulation and security are on the rise and these too must be addressed in order to secure digital assets as a cornerstone of the financial ecosystem.
It is fundamental that throughout this market downturn we use increased institutional investment as an opportunity to educate, innovate, and regulate as crypto continues to establish itself within the financial industry.
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