Unquestionably institutional players have entered the crypto race, they have done incognito for 5-6 years now. The discussion now centres around when firms of significant size are going to announce officially that they are active holders of coins and commit to the new asset class.
Bloomberg revealedÂ that large buyers such as hedge and endowments funds have been consistently purchasing over $100,000,000 worth of various digital coins through private transactions. Reports have indicated they have even set up their own liquidity desks and operations to accommodate the estimated $250 million to $30 billion in trades.
Previously, large investors have stayed clear from the crypto-investing space due to the high volatility of the key currencies. Yet with up to a 95% sell-off in a bear market and as bitcoin and ether prices seem to have stabilised, more and more traditional financial institutions have started diversifying their portfolios with crypto assets.
New crypto-investment products coming soon
A banks main aim is to make money from its clients and with such hype and demand, itâ€™s not long until designated desks are formed. Goldman Sachs Group has just become the first investment bank to offer a bitcoin trading product to its customers. At the beginning of November, GS started to test their new crypto trading desk, which allows trading bitcoin non-deliverable forward contracts.
Intercontinental Exchange (ICE), the owner New York Stock Exchange, will also announce a Bitcoin futures productÂ for later in December. The contracts will be backed by bitcoin reserves held in ICEâ€™s Digital Asset Warehouse, meaning that actual bitcoins will change hands once the contract expires.
â€śLegislative changes regarding financial products are bringing in more transparency and legitimacy to the crypto-trading space,â€ť said Hayato Terai, Co-CEO of G8C token-issuingÂ GanaEight Coin Ltd., a Ganapati Group company. â€śThe ICO space will soon undergo similar changes as well. With better regulations and security mechanisms such as tokenized securities and stablecoins already being introduced, we should expect more interest and participation from institutional investors.â€ť
Furthermore, earlier this year, Goldman Sachsâ€™ Principal Strategic Investments Group and Galaxy Digital Ventures LLCÂ partnered and subsequently invested in BitGoâ€™s productÂ â€“ a purpose-built wallet for storing digital assets, aimed specifically for institutional investors.
Less liquidity but less volatility
Contrary to popular belief, institutional investors can support large crypto holders. Previously, large volume crypto purchases caused big swings in the crypto markets and crashed exchanges. A lot in the industry fear that bitcoin liquidity may soon become a problem due to institutional investorsâ€™ participation. However, during the past two months, the crypto markets remained stable despite large volume purchases and did not tick upside. The range has been between $6,200 -$6,600 and no major dramas. Unlike private investors, financial institutions are largely restricted in their abilities to manipulate the markets on a large scale. The lack of liquidity may actually contribute to more stable prices.
Crypto-trading security will HAVE to improve
One of the biggest issues preventing entry into the cryptocurrency market for institutional investors is the lack of proper, secure infrastructure. As it stands, very few operate in the proper manner and this is the case globally.
Compliance and KYC procedures have not been optimised or maintained. A recent statistic showedÂ 68% of cryptocurrencyÂ exchanges operating in the U.S. and Europe are not fully KYC compliant. Most of them allow users to trade fiat and cryptocurrencies without providing any identification documents or undergoing a KYC check. Â The result is diminished trust and hesitant regulators â€“ not a good landscape for IIâ€™s.
However, most institutional investors are now working closely with the regulating bodies to develop clear KYC/AML policies and guidelines that benefit all concerned. Crypto EFT is getting closer to the approval with the SEC in the US. In Switzerland,Â Crypto Fund AGÂ has recently become the first and only crypto asset manager, authorized by the local Financial Authority. As each country and jurisdiction has a permitted and committed trailblazer, support and confidence will follow.
Institutional investors have capital and liquidity and can propel the development and adoption of new regulatory frameworks. They know about systems and processes which ultimately will add more transparency and legitimacy into cryptocurrency.
Action being taken
American multinational investment bank, Morgan Stanley has released a detailedÂ 50-page report on Cryptocurrency and Blockchain unveiling the bankâ€™s ongoing research into the rapidly-developing asset class. It is said to be developing a â€śrapidly morphing thesisâ€ť on Bitcoin and the general industry.
TheÂ note outlines how the market has experienced a significant decline in trading volume and a surge in institutional investment. It also offers a brief historical overview of how Bitcoin and a subjective overview of how cryptocurrency is perceived by the public, mentioning how it has been seen as digital gold, a fundraising mechanism, a hedge against failing assets and most recently, a new asset class used by institutional investors.
For the case against, while speaking at the Web Summit 2018 in Lisbon, Portugal, during this week Revolutâ€™s CEO, Nikolay Storonsky, claimed that institutional clients did not show an extraordinary interest in investing in crypto. About it, he said:
â€śUnless these big institutional investors and hedge funds move heavily into the crypto world I just donâ€™t think banks will move because they simply try to make money from their clients.â€ť
There are some experts that believe that the market has already bottomed and that it could soon start growing again. Despite this, Storonsky and Larry Fink, BlackRockâ€™s CEO, are sceptical about that.
Fink, going against the grain, explained that Blackrock would not be launching a cryptocurrency related ETF. He is waiting for the market to become more mature in order to do so. The SEC is pending on a decision to approve aÂ crypto ETF forecast forÂ the coming year. If approved this could mark a significant bull run again with support from a regulatory perspective.
It is worth mentioning that back in 2003, when the first Gold ETF was approved, the price of this precious metal increased more than 300%. It is not clear what will happen with Bitcoin and the cryptomarket. However, it is clear that institutions are here ready to invest in these digital assets if the SEC gives it the all clear.
Rumour has it that other companies such as Barclays, Nasdaq and Citigroup are planning to start their strategy to enter the cryptocurrency market.
During 2018,Â digital assetsÂ have experienced one of the most aggressive bear trends. Google searches forÂ â€śBitcoinâ€ť and â€śX or Y price predictionâ€ťÂ have decreased over the year. The mainstream interest for Bitcoin is not here as it was during 2017 mania.
Analyst Garret Keirns told Forbes: â€śpeople are afraid of losing their money after investing when Bitcoin was worth more than $10,000 earlier this year. And clearly, this is something normal,â€ť continuing he said â€śespecially the Coinbase retail crowd who bought in at the peak. In addition to a slumping crypto market, these folks are starting to see their 401k and equity portfolios losing steam.â€ť
In order to end this bear market, experts and crypto enthusiasts are waiting forÂ institutional investorsÂ to place their funds into the market but no at the expense of bonds or equities within their portfolios.
Nigel Green, founder and CEO of deVere Group, said to Forbes â€śthere is an increased feeling amongst institutions that they need to explore digital currencies.â€ť Additionally, he mentioned that â€śthese institutions think that if they do not start to invest in blockchain or virtual currencies, competitors would do it first.â€ť Fear of missing out or FOMO is very real in investing even for institutions – and thatâ€™s how bubbles are created.