Why Institutionalization is coming to the crypto space

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by jw

Digital assets such as cryptocurrencies have been gaining popularity among investors and the general public for the last few years.
The current bull market, which catapulted the combined market cap of all cryptocurrencies past 1.5 trillion USD, resulted in a huge hype about blockchain and a surge in its mainstream adoption. More and more people are learning how to use and benefit from cryptocurrencies, how to invest in them, and how they could potentially disrupt our current financial markets.

Recently, billion-dollar corporations like Tesla, PayPal, Microsoft, Visa and Mastercard all announced their entry into the crypto space – which made digital assets grow in popularity even more among the mainstream as well as institutional investors.
In this article, we will look at the findings of three different studies that were conducted among institutionalinvestors like hedge funds, VCs and family offices last year, to explore why their interest in digital assets is growing.

According to Grayscale, the world’s largest digital currency asset manager, 2020 saw institutions adding Bitcoin to their balance sheets. In 2021, we may see nation states follow suit!

Grayscale Study

In Q4 2020 alone, institutions accounted for 93% of capital inflows, or $3 billion on Grayscale. The amountof Bitcoin that was flowing into Grayscale Bitcoin Trust in Q4 2020 was nearly double the amount of Bitcoin that was mined in that same time period – this trend continues to be a major contributing factor in the limited available supply of Bitcoin in the market.

Speaking about the popularity of the Grayscale Bitcoin Trust, CEO, Michael Sonnenshein, said:

“We saw a meaningful acceleration of institutional participation. There’s no longer professional risk of investing in the digital currency asset class – there’s probably more career risk in not paying attention to it.”

– CEO, Grayscale

Fidelity Assets Study

According to a survey by fidelity digital assets, 6 in 10 investors believe digital assets have a place in their investment portfolio and 36% say they are currently invested in digital assets.

Almost 80% of the institutional investors that participated in this study answered that there was something appealing about digital assets, with the three almost equally compelling characteristics across U.S. and European investors being: uncorrelated to other asset classes (36%); an innovative technology play (34%); and high potential upside (33%).

Within the next five years, 91% of respondents who were open to exposure to digital assets expect to have a minimum of 0.5% of their portfolio allocated to digital assets like cryptocurrencies.

It’s interesting to note that Bitcoin is still the most commonly known and owned digital asset: while over25% of investors answered that they were holding Bitcoin, only 11% had exposure to Ethereum, thesecond-largest cryptocurrency.

Evertas Study

In a 2020 study by Evertas, the world’s first cryptoasset insurance company, institutional investors from the US and UK who are collectively managing over $78 billion in assets were asked about whether they expect to see a rise in cryptocurrency investments.

26% of participants believe that over the next five years, institutional investors will increase their investments in digital assets “dramatically”, while 64% anticipate “a slight rise.”

When the participants were asked about the reasons for their answer, 84% answered “it was because they expect the regulatory infrastructure for the market to improve”, and this is followed by 80% who said it is “because the crypto market will become much bigger, providing greater liquidity.”

76% of study respondents also agreed that it is because they expect more financial services institutions to enter this space, therefore increasing the funds and investment vehicles in this area.

Commenting on this growing interest in digital assets by institutional investors, CEO of the exchange platform AAX Thor Chan says:
“Bitcoin and other cryptocurrencies are finally proving their worth to institutional investors.
While the traditional financial markets globally plunged to new lows during the pandemic, cryptos illustrated consistent growth.

This is why we saw major institutional players investing hundreds of millions of dollars into Bitcoin and other crypto assets.”

What is slowing institutional adoption of digital assets?

The Evertas study revealed that 56% of study respondents said they are ‘very concerned’ about the lack of insurance cover for cryptoassets, while 54% were ‘very concerned’ about the working practices and compliance procedures of companies in the sector who supply services to institutional investors.

Other concerns of the participants include “the quality of custodial services in this market, the availability and quality of trading desks, and reporting facilities.”

Participants of the fidelity assets study named the following hurdles to cryptocurrency adoption: “price volatility (53%), concerns around market manipulation (47%), and lack of fundamentals to gaugeappropriate value (45%).

However, it is encouraging to note that the strength of concerns has decreased notably since last year across almost all factors. (Price volatility concern fell 13%, concerns around market manipulation fell 6% and lack of fundamentals fell 8%.)

How Blocksize Capital enables institutional Investors to benefit from the digitalassets in the most convenient way

Different studies have shown how the interest in digital assets is growing among financial institutions, as we explored in this post.

However, the studies also revealed that there are still some concerns that slow down institutional adoption. For most, the digital asset market is still unknown territory and seemingly comes with great risk.

Blocksize Capital manages to substantially decrease this risk by providing software-as-a-service applications for institutional asset managers that

create an infrastructure for trading and the administration of Digital Assets, as well as tracking and aggregating portfolios.

Blocksize Core, the modular, low-latency trading backend, additionally integrates data from all major exchanges, allowing unique insights into crypto markets as well as efficient order placement and execution.

Due to the fragmented nature of information across crypto-exchanges, we built a high-performance solution with world-class execution capabilities in one fully integrated interface. Our unified API connects seamlessly to any underlying legacy infrastructure.

Blocksize capital provides a comprehensive suite of tools for institutional asset managers, allowing them and their clients to benefit from the digital assets market in the most convenient way with an all-in-one solution.

Conclusion

In the past year, several studies across different countries have shown an inevitable growing interest in digital assets among financial institutions.

Cryptocurrencies definitely seem to be appealing to asset managers and many already recognize their potential for future growth, but there are still some concerns regarding the price volatility and market manipulation that are slowing down the adoption.

With tools like Blocksize Capital’s trading software, these doubts could be cleared, enabling financial institutions to benefit from this emerging market.

All in all, the trend towards cryptocurrency adoption is growing – and this goes for corporations, governments, the mainstream population, and especially financial institutions.

Mike Novogratz, a billionaire hedge fund manager and long-time crypto enthusiast who started a $500 million hedge fund focused on cryptocurrencies, sums it up perfectly:

“The institutionalization of this space is coming. It’s coming pretty quick.”

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Portrait Thomas Langbein

Thomas Langbein

Head of Sales & Business Development

tl@blocksize-capital.com