It is more than a decade now since Bitcoin came into existence. As of January 2, 2019, the crypto market cap stands at $129 billion, with more than 2K cryptocurrencies active on exchanges worldwide. After an impressive bull run in 2017, the market saw a drastic correction in January 2018. The year proved to be bearish overall.
Despite rapid expansion of the market and vast adoption of blockchain technology, the crypto asset class still remains in its infancy. Compared to traditional financial instruments, it still represents only a tiny fraction of the global financial markets.
Institutional Investors are Needed by the Crypto Industry
If the crypto industry has to gather credibility, it will need to open the gates for institutional investors. After all, institutional money led to an 8-year bull run in the global stock markets. Unless institutional investors embrace the digital asset class, the market cap of the crypto industry is unlikely to reach its full potential. Only through institutional interest will individual interest be ignited, this works both ways.
Inflow of funds from institutional investors will lead to greater regulatory certainties and safer technological and physical infrastructure for crypto trading. At the same time, as the market continues to mature, it will attract credible and worthy players. So, what is preventing institutional investors from adopting the digital asset class?
What’s Stopping Institutional Investments?
1. Lack of Information about a Highly Volatile Market
Although blockchain technology is touted as the disruptor of the modern financial industry mechanisms, it remains an enigma for institutional grade investors. Blockchain companies, providing “tokens” instead shares of ownership, is a new concept that they still haven’t gotten used to.
They are skeptical about investing in a product that they don’t completely understand yet. For major investment sources, the market only represents a downside risk. This is an asset class with no brand recognition and an absent custodian.
Many players even consider it a significant career risk. For example, a CIO of a well-known investment firm commented on how the cryptocurrency index fund proved fatal for pension fund investments he was overseeing, as investors were skeptical regarding what was backing the digital asset.
2. Regulatory Confusion around the World
Lack of security and regulation are both significant deterrents to institutional money in the crypto space. If there is one thing that big banks and firms are cautious about, it is treading on the wrong side of investment laws. In 2018, the US SEC cracked down on many blockchain offerings, citing them as securities in the guise of utility tokens.
Plus, consider the fact that no exchange traded products related to crypto asset trading has been approved for listing by the US SEC. Selling securities today, without approval from the US SEC, is a gross violation of federal laws.
Taxation laws aren’t clear either. We have seen how various companies choose to launch their token sales in off-shore destinations like Malta and Estonia, for lighter taxation laws. But, if you look from an institutional investor’s perspective, this is what makes investment seem risky, if not shady.
3. Absence of High-Grade Trading Platforms for Institutional Players
Unlike forex, stock or commodities trading, the crypto market doesn’t have enterprise-grade trading platforms. There is no go-to verified sources of market information and necessary data from fundamental or technical analysis. Major crypto exchanges lack security, infrastructure, liquidity and technology needed to execute large block orders.
Also, consider the fact that even the world’s largest cryptocurrency exchanges have a daily trading limit. This is why major institutional players are now increasingly resorting to OTC trading, rather than taking liquidity risk in the form of stable coins.
Things Are Looking Bright for the Future
The over-the-counter (OTC) way has proved to be a respite for the crypto markets, as large institutional investors are increasingly coming into the crypto race. According to Bloomberg, large endowment and hedge funds have started buying over $100,000,000 worth of crypto assets in private sales.
2019 will likely infuse new regulatory certainties in ICO launches. The bearish climate of 2018 is likely to have rid the market of bad players and ICOs that have nothing worthwhile to offer will die down. This will make institutional investors confident about the ICO market.
The emergence of Security Token Offerings (STOs) will assure big firms of compliance with laws and regulations. They will provide opportunities for programmable ownership, providing skeptical investors with equity offerings that can be adjusted according to a company’s cap table, dividend schedule and voting rights.