Is institutional investment in crypto on the rise?

In Insights

Regulation has become more concrete, venture capital is driving innovation and even banks are getting on board.

It’s too early to make bold predictions, but the numbers tell us that the integration of cryptocurrencies into conventional modes of finance might come sooner than we think.

Five out of the top 25 wealthiest American colleges have invested in cryptocurrency funds; according to Morgan Stanley’s 2018 report 48% of Bitcoin trading comes from hedge funds; and at least 50 stable coins were launched in the past year.

In 2019, Morgan Creek Digital made headlines by being the first US pension fund to directly invest in cryptocurrencies.

Within the crypto community, this shift from cypherpunks to institutions has received a mixed response.

On the one hand, more investment expands the market, yet on the other, diehard critics argue this signifies crypto’s susceptibility to systemic risk – the same kind that led to the 2008 financial crisis.

This is where it’s worth distinguishing between cryptocurrencies themselves and the financial institutions that invest in them.

There are a number of reasons why institutional investment marks the beginning of positive changes.

Why should it matter?

Better custodianship = better crypto

Custodianship, in financial terms, refers to when a company (the “custodian”) has physical possession of an investor’s assets, which are deposited with that custodian for convenience and security.

Unless you have your own hardware wallet, chances are that if you hold cryptocurrency, you’re using a custodian.

The crypto community has seen some pretty bad examples of poor custodianships, such as when exchanges get hacked and lose millions of dollars of investors’ money, or when the exchanges themselves turn out to be fraudulent.

The more we see institutional investors enter the space, the higher the bar is raised for stricter standards of custodianship.

Recent controversy over the transparency of trading volume indicates that there is a higher demand for accountability and due diligence. Institutions catalyze this process because they have a reputation to uphold.

More liquidity

Liquidity is the degree to which a particular asset can be quickly bought or sold without affecting its price stability.

Daily trading volumes of cryptocurrencies are still well below the global stock market and this lack of liquidity makes crypto asset prices more volatile than they should be.

Institutions seek consistent profits over time, so they not only increase liquidity by bringing larger sums of money into the market but also invest in assets that can be algorithmically modeled, leading to a more robust market that is less susceptible to speculative hype.

Greater access

Cryptocurrencies suffer from a lack of on-ramps and off-ramps – platforms that facilitate people converting their fiat money into cryptocurrencies and back again (like we offer on Liquid).

Institutional investment provides alternative pathways for this conversion to take place as well as more diverse investment products with varying levels of risk. In other words, crypto is no linger restricted to tech-savvy traders, but is an easy investment for anyone looking to diversify their assets, no matter their level of technical knowledge or appetite for risk.

Regardless of what side of the fence you’re on, there are a number of important consequences that institutional investment will have for cryptocurrencies. At Liquid, we’ve seen it all – from the prolific growth of 2017 to the sobering moments of 2018 – and we welcome organizations that seek to expand and mature this industry.

If institutional investment means tighter spreads, increased transparency, better security and accelerated innovation, then this is a trend well worth watching.

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Photo credit: Jason Thibault

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

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Liquid

Providing liquidity for the crypto economy.