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The Institutions are coming to cryptocurrency

Crypto started as a protest against the failure of the financial system in 2009. That protest began with the seed of Bitcoin and has grown to more than 6000 different ideas about the future of finance.

While many crypto enthusiasts myopically look at institutions as the catalyst for price increases in existing projects, they miss the bigger vision. The role that institutional involvement will play in crypto is much more substantial than potentially driving simple capital gains.

As Institutions commit capital and investment, they will accelerate the development, expansion and adoption of the cryptosphere. This growing involvement will provide legitimacy to crypto that will drive wider societal adoption and acceptance.

This process is underway led in part by a handful of well-known institutions, professional management teams and forward-thinking entrepreneurs.

Discovering our financial future will require significant investment in code, energy, mental horsepower and capital. And it is capital that institutions have plenty of, for the right investments, at the right time.

 

What’s holding the institutions back from crypto?

When cryptocurrency and Bitcoin advocates talk about institutional money, their pitch involves terms like non-correlated assets and missing out. What many of these crypto pundits forget is that fund managers don’t get fired for being like their peers. They do get fired for sticking their neck out and being wrong and for violating regulations.

Crypto advocates, from a largely unregulated, speculative and growing industry, often forget that institutions are constrained by specific responsibilities. Pretty much all institutional money has covenants, rules and regulations to abide by. They are bound by a fiduciary duty to their investors, meaning they have direct responsibility for how the money under their care is invested.

Crypto’s somewhat wild west characteristics are limitations for many traditional investment institutions. Besides hedge funds and those in Venture Capital, few large institutions are willing to experiment with their investors’ money.

But there’s been some important signals that crypto has matured. Familiar product and service offerings and the transformation from the crypto hobbyists to teams of professionals are leading the way.

The future of crypto is professional

As crypto businesses like exchanges and Bitcoin mining have moved from hobbyists to professionals, more institutions have been committing capital.

Professional management coming out of legacy finance has been crucial in developing important crypto infrastructure. Some essential efforts have come directly from institutions like Fidelity, ICE and the CME group as they step into the void.

Professional management has worked closely with regulators to help them understand the technology and it’s potential. And regulatory understanding and buy-in is a powerful signal to regulated institutions.

Every Bitcoin mining company like Bitfarms that goes through a full prospectus offering with regulators increases understanding of the business model. Every Bitcoin fund that goes through the regulatory hurdles and gets listed helps regulators be prepared for the next one.

Institutions and other professional crypto management teams are at the heart of creating the conditions driving better policy, better rules and regulations.

Institutions lead the way for institutional crypto adoption 

Institutions can now gain exposure to Bitcoin through various other financial products provided by heavyweights in the industry. The CME Group added Bitcoin options and futures. Jeff Sprecher’s Intercontinental Exchange developed the Bakkt Exchange with a full suite of cryptocurrency products and services.

Fidelity has stepped up with a licenced custody option and trading platform. While JP Morgan has taken steps to signal its support for the sector by offering banking services to select cryptocurrency businesses.

Insurance was another barrier to entry for institutions given some of crypto’s public failings. Crypto insurance is being led in part by Marsh and Lloyds of London.  And the pricing of this insurance is going through its own discovery period.

In 2020, several cryptocurrency firms have bought or established prime brokerage desks to serve institutional clients. These will provide suites of services large institutional firms expect from their traditional financial experience.

Digitizing assets and new funds

A suite of products like 3IQ’s Bitcoin fund and Greyscale’s Trust funds provides alternative ways for institutions to gain exposure.

There is also the trend in stablecoins with offerings like Stablecorp’s QCAD and Circle’s

USDC developed on the Ethereum platform. Stablecoins present an essential use case for payments, dollar access and the efficacy of the Ethereum model.

Stablecoins are also influencing future financial policy by driving the development of central bank digital currencies. A race to create a global scaleable stablecoin market will have significant implications for institutional investment.

Firms like Toronto’s Exponential are developing digitized asset-backed crypto products around numerous physical assets. Digitization of physical assets, done the right way provides an attractive investment thesis for institutions looking for alternative investments.

Familiarity is valuable for regulators and institutions

Many crypto products have evolved from traditional finance, providing familiarity to both institutions and the regulators they are governed by. Institutions now have a variety of ways to experiment, express an investment thesis and get exposure to crypto.

Institutions are also more capable of meeting their risk management requirements while exploring something like Bitcoin directly. The existence of Bitcoin derivative products allows them to hedge their exposure in various ways.

Direct participation of institutions in crypto will help by increasing levels of price discovery. The result might be price appreciation, but it will most likely dampen some of the extreme volatility in these products.

Familiar products and a more diverse range of options to participate will eventually lead to more education and greater involvement. This is why the ongoing proliferation of more digital/crypto interpretations of traditional finance should continue.

When it’s time to scale crypto, the institutions will be there

The current crypto environment involves more than 6,000 ongoing experiments in the form of tokens, altcoins and many different DeFi elements. There are thousands more that have been tested and failed.

Through these experiments, leading teams will be recognized, new insights will be gained, and the number of business and innovation opportunities will expand.

Big money will be made after all the token, ICO and altcoin experiments are tested and vetted for performance and capability. These tests pave the way for the most important element of institutional involvement: to accelerate and scale crypto development and expansion through investment.

Ultimately, institutional involvement in crypto is much more than the narrow focus on capital gains for existing evangelists.

When the institutions join the party in size, they will facilitate the rapid expansion of the cryptosphere. And that development will create new and exciting businesses, ways to make a living, get banked and interact with others.

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