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Institutions Are Driving Interest in Digital Assets—But is the Industry Prepared?

January 20, 2021
The massive rally in cryptocurrencies is almost unrecognizable from three years ago. When the Bitcoin (BTC) price marked its all-time high just shy of $20K in December 2017, it was exclusively retail-driven. Regulation was scant and insufficient; hacks, scams, and Ponzi schemes abounded; investors made (and lost) a lot of money overnight; and major financial institutions like JPMorgan were steadfast in calling BTC a "fraud" and a "bubble."

The space was still so immature that, at its frenzied height, crypto derivatives had yet to be introduced. Of course, many institutional investors were watching with interest. After all, gains of such magnitude in any asset class are difficult to ignore. However, the infrastructure was too cumbersome, risky, and inadequate to suit the needs of large institutions with equally large compliance burdens and generally conservative clients.

How the Crypto Landscape Has Changed

Since then, we have witnessed the incredible perseverance and development of the sector as a whole, with the total crypto market cap now standing at well over $1 trillion. Scalability and security has improved. Networks are more robust. Regulation offers more clarity–at least, where BTC is concerned–and the growth of crypto derivatives has been ignited by large, regulated players such as the CME, CBoE, and ICE markets-backed Bakkt, now preparing to go public in a $2.1 billion deal.

BTC has caught the eye of traditional, global macro investors and hedge fund managers such as Paul Tudor Jones and Stanley Druckenmiller, both of whom are buying BTC as a "hedge" to "inevitable inflation" and expecting it to "work better" than gold. Large institutions have been adjusting their positions quickly, from Manulife to Guggenheim Investments. In fact, a recent thesis by Guggenheim argues that, based on its scarcity relative to gold, BTC should be worth $400,000.

The face of the corporate treasury is also being changed forever as massive names like MicroStrategy (NADQ:MSTR), Square (NADQ:SQ), Galaxy (TSE:GLXY), and Stone Ridge Holdings Group accumulate BTC as a balance sheet asset. MicroStrategy's holdings alone (to date: 70,470 BTC) represent a value of approximately $2.5 billion at the time of writing. As traditional corporate treasury "low-risk" assets like bank deposits and treasury bills fail to return yield, both publicly listed and private companies are forced to rethink their risk/return strategies for investors. 

While the derivatives market has exploded since 2017, not all institutional investors, particularly those representing family offices and pension funds, are looking to trade highly leveraged products for yield. However, the excellent prospects of BTC as a scarce asset for capital appreciation have become overwhelmingly apparent (and never more so than against the panorama of a weakening dollar and ballooning money supply). 

Even with a fairly consistent run on equities after the March 12 crash last year, interest in BTC and other digital assets has been rising and, along with it, demand from clients to see it in their portfolios. Should we reach a point where the stock market begins to flatline again, this will only increase investors' appetite further for alternative assets.

Cryptocurrency and Institutional Investors

The cryptocurrency space is indeed responding to this demand and, in fact, has anticipated it in advance. Pioneering digital asset companies like Diginex have helped to take cryptocurrency to the mainstream, being the first company with a cryptocurrency exchange to go public and list on the NASDAQ in Q4 2020. This has paved the way for other large players in the space to do the same, with several important names preparing their IPOs this year–and many more to follow. 

It will be interesting to see how the market reacts and to watch those who truly understand the value of being an early adopter. Anyone who missed out on the IPOs of Facebook, Amazon, or Tesla will want to ride on the cusp of this next big wave. 

More is being done to capture and retain the interest of large investors, and we've seen landmark moves from regulators, particularly in the U.S., with the Office of the Comptroller of the Currency (OCC) allowing U.S. banks to provide custody services of digital assets for customers, as well as use blockchains for payment settlement. 

This is a huge step in the right direction as institutions need institutional-grade custodial solutions such as Digivault, to keep their funds secure. They need to work with a regulated, transparent institutional crypto trading platform that can provide them with market experience and depth as well as the security of their assets–and the assurance of the most rigorous AML and KYC standards in the world. 

Institutional investors need sophisticated products that are tailored to them, allowing them to execute flexible trading strategies, effectively manage risk, and maximize capital through risk-averse strategies such as arbitrage.

They also need the assurance of a trusted NASDAQ-listed name like Diginex that ensures there are no opaque practices on the platform such as last-look or front-running from internal market makers. Institutions need their digital asset exchange to provide solid data protection practices, fair liquidation mechanisms when it comes to derivatives, and the ability to cross-collateralize positions with portfolio margin. 

In short? The crypto space needs to grow up–and it needs to do it fast. Many of these regulatory assurances and sophisticated trading tools are absent when it comes to incumbent loosely regulated exchanges largely geared to retail traders. Yet this is just some of the necessary infrastructure that we need to keep the institutional money in the space.

Where We Go from Here

The demand for digital assets was already becoming clear but has been greatly accelerated by the multi-trillion-dollar stimulus packages in response to COVID-19 that have served to dilute the value of fiat, along with near-zero interest rates that make traditional low-risk assets increasingly unattractive. Regulation surrounding BTC is now at a point where institutions can comfortably invest, and 2021 looks set to see the entrance of more and more investors with larger sums of money.

In fact, several leading analysts including analysts from JPMorgan have predicted that gold will suffer over the coming years as many investors transfer their wealth into BTC. The number-one cryptocurrency has already seen greater inflows since October 2020 while funds have been funneled out of gold.

With forward-looking banks and regulated exchanges offering custodial services and faster settlement with stablecoins, large financial institutions that fail to digitize and embrace blockchain technology will be left behind–as will those investors who fail to understand the significance of the newest IPOs on the horizon in the crypto space. 

Just consider Australia's main stock exchange, the Australian Securities Exchange (ASX), which will become the first global market to replace its current clearing system with blockchain technology. As a digital asset, custodians must be able to support blockchain to custody Australian equities. This is but one example. 

The future direction is clear, and, for institutions to stay engaged and onboard, they will need to leverage the expertise and infrastructure of exchanges like EQUOS as their chosen institutional trading platform.


Written: Paul Goldman, Group Head of Sales, Diginex

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