As industry participants, we’ve seen the size and scope of the crypto industry surge over the past twelve months. And with governments in the UK and US more recently setting out their strategies to integrate digital assets into the existing financial system – and ultimately regulate the decentralised financial market – it’s clear that crypto is on an upward trajectory in the consumer space.
But what does its rise mean for the institutional trading market, where cryptocurrencies are also gaining momentum?
Getting comfortable with crypto
Cryptocurrencies have existed for over a decade now. Like many other industries, decentralised financial instruments may have started out with a focus on individual consumers, but their rise in popularity and usage has left larger institutions with little choice but to begin setting out their strategies on how to integrate cryptocurrencies into their business models.
You can see more institutional investors such as hedge funds and pension funds getting more comfortable with crypto. Estimates suggest that nearly a quarter of fund managers expect to increase exposure to crypto-related assets over the next two years, while in 2021 alone institutional inflows into crypto markets reached a record USD 9.3 billion – a 36% increase from 2020.
Some of the most reputable institutions are already taking advantage of decentralised financial technology. Goldman Sachs, for example, recently announced that it was offering its first ever Bitcoin-backed loan in a significant expansion of its crypto footprint.
Creating an environment conducive to growth
~Novel Serialisation: Heavens Fire~
Cryptocurrencies are clearly gaining traction on an institutional level, but we shouldn’t label them as being in the institutional mainstream. Many industry players find that regulation, trust and infrastructure remain a primary barrier to entry for many firms looking to expand their crypto trading offerings.
For institutions to truly boost their exposure to cryptocurrencies, they must ensure they have the necessary controls in place for investors to be comfortable. I believe greater regulatory clarity is a critical step towards achieving this.
Although some in the crypto space seriously oppose regulation – arguing that it would pose a barrier to innovation – I think that the implementation of a clear and well-developed set of rules will be vital towards integrating cryptocurrencies into institutional trading markets. Institutions will ultimately be investing hundreds of millions of dollars into the crypto ecosystem each year, and having confidence in the industry through regulation is key.
We should see the recent crypto ‘crash’ as a symptom of the volatility of the broader crypto market, and it shouldn’t be surprising that official bodies such as the Federal Reserve and the Bank of England have repeatedly warned us that we should be prepared to lose money if we invest in cryptocurrencies.
These warnings have become a reality over the past couple of weeks – and if anything – should serve as the impetus for introducing the regulation needed to make crypto a more orderly and stable marketplace. This will be key to giving institutions the confidence they need to fit crypto into their investment strategies.
What next?
Further adoption of cryptocurrencies from the institutional community will undoubtedly enhance the development of crypto assets. This process is already underway, with increasing numbers of institutions allowing customers to trade, stake, borrow and lend against their digital assets.
However, I believe that more institutional adoption will only come with robust and interoperable regulatory frameworks. Trust in partners and products is the single most important factor underpinning any trade or transaction – and for crypto to continue its institutional expansion, effective regulation will be paramount.
By Todd Crosland
Todd Crosland is the Founder and CEO of CoinZoom, a global digital currencies brokerage firm. Todd has assembled a world-class team that brings decades of financial trading and regulatory experience to the growing digital currency trading marketplace.
