Institutional Crypto Remains a Waiting Game
High net worth investors, family offices, and an ever-growing number of hedge funds may be active in the spot cryptocurrency market, but pension providers, mutual fund/UCITS managers, and investments will have to wait a few more years before they can join the crypto game.
The delayed adoption is due to a combination of market structure and regulatory issues, according to Monica Summerville, head of European research & senior analyst, fintech research at Tabb Group.
“Most of the crypto exchanges’ customers are predominately retail, and many of the founders have come outside the wholesale financial markets,” she explained. “So it is unsurprising these exchanges lack features and services required by institutions.”
Standard features of other institutional markets, such as the use of the FIX messaging protocol, sophisticated order types, and trade surveillance, are often lacking in many cryptocurrency exchanges.
“There are a few exceptions, such as Coinbase, Digital Currency Group’s Genesis Trading, the Winvklevoss Capital-backed Gemini, and Circle, which do already offer or are planning to launch products that cater to institutions like custody, block trading, and other services,” said Summerville. “The reality, though, is that crypto exchanges can make millions a day from their retail customers, and with crypto talent scare, finding the motivation and resources to pivot toward institutional clients is a big ask.”
As people with institutional experience found and fund trading-infrastructure providers work with financial regulators work to address the market’s institutional shortcomings, institutional investors can gain cryptocurrency exposure via derivatives and the evergrowing number of crypto-focused hedge funds.
Another option, according to Summerville, would be to invest in the enabling technologies that fuel the cryptocurrency market, such as chip manufacturers and mining companies.
Then again, typical institutional investors may not be as sold on cryptocurrency as an asset class as their retail counterparts.
When Context Summits asked 400 allocators, who attended its conference, whether cryptocurrency was a fraud or a legitimate investment, a quarter of the audience was not sure while the rest of the audience was evenly split, according to a focus note recently published by Tabb Group.
The majority of the respondents, 71%, also had no intention to allocate to a cryptocurrency fund in 2018 while 11% of those polled indicated that they would, and the remaining 18% were not sure.
“The large institutional investors are very risk averse, rightfully so, given the number of client funds they hold and the related fiduciary responsibility,” she added. “However our research has shown that smaller institutional investors, such as family offices, or smaller investment managers like US IRA managers are already investing directly, in which case they hold assets themselves or use a custodian service.”
The firm plans to test the issuance and administration of bonds backed by crypto assets.
Technology enables market surveillance and direct market access.
Monitoring focuses on transmission channels that may give rise to financial stability risks.
The offering aims to drive institutionalization of the cryptocurrency market.
The industry body is exploring the new instruments from multiple perspectives.