Institutions Still Investing in Crypto Despite Slowdown

[ad_1]

The crypto industry has had no shortage of setbacks over the past year. But, while some pundits see FTX’s collapse as the nail in the coffin, institutional investors seem out of step with the series of crises.

Let’s take a look at the crypto winter, why institutional investors are ignoring the crisis, and what’s next for the industry.

Crypto Winter turns into a blizzard

The crypto winter began in May 2022 with the collapse of TerraUSD ($UST) and its sister coin supporting it, Terra ($LUNA). As well as wiping out $40 billion in value, the collapse had a ripple effect on other stablecoin-backed crypto projects. After all, many investors use stablecoins as collateral for crypto loans.

Some high-profile casualties included:

Celsius Network, a bank-like crypto service, fell more than 80% between March and July. Three Arrows Capital, a crypto hedge fund, imploded and failed to repay billions in loans. Voyager Digital, a crypto broker, failed to receive a $350 million loan payment from 3AC and filed for bankruptcy in July.

However, by far the biggest victim was FTX and FTX.US, which operated some of the largest crypto exchanges in the world. While politicians and venture capitalists were on the fence about other projects, Sam Bankman-Fried (SBF) had become a high-profile crypto celebrity beloved by venture capitalists and even a major political donor.

After FTX filed for bankruptcy on November 11, BlockFi, a crypto exchange, froze customer withdrawals following the collapse of FTX and filed for bankruptcy on November 28.

All of these developments had a massive impact on all crypto assets. The global cryptocurrency market capitalization has fallen from nearly $3 trillion to less than $900 billion in less than a year. And even big cryptocurrencies, like Bitcoin and Ethereum, have yet to recover from losses.

Institutional investors remain active

Retail investors, entrepreneurs and venture capitalists have taken a step back from the crypto space after the billions of dollars in losses. Unsurprisingly, fewer investors seem willing to speculate on the next ICO or NFT after getting burned this year.

However, there is evidence that institutional investors have taken a different tone. For example, Bitstamp, a crypto exchange, told CoinTelegraph that institutional listings on its platform increased 57% in November compared to October. And at least three recent surveys have revealed similar sentiments among institutional investors.

Results of a recent Coinbase institutional survey. Source: Coinbase

These surveys included:

Coinbase’s 2022 Institutional Investor Digital Asset Outlook Survey found that 62% of institutional investors had increased their allocations to crypto in the past 12 months. Additionally, 58% plan to increase the percentage of assets they invest in crypto. Fidelity’s digital asset survey found that 74% of institutional investors plan to buy or invest in digital assets in the future, up 3% from 71% in 2021. Additionally, affluent investors reported a substantial increase in future preference to buy digital assets. assets, rising from 31% to 74% year-on-year. CoinTelegraph’s institutional survey found that 43% of institutional investors already own digital assets, primarily Bitcoin and Ethereum. Additionally, the survey revealed that investors are interested in adding tokenized securities and NFTs to their portfolios.

Coinbase’s institutional survey suggests that many funds have created a separate category for crypto or classify crypto as part of an innovation or emerging technology allocation. As a result, these funds purchased crypto assets to improve funding status and meet their target asset allocations in these categories.

By comparison, only 34% of Coinbase respondents said they invest in crypto assets as a buy-and-hold opportunity. In fact, 56% thought investment grade corporate bonds would offer better returns than digital assets which tied with real estate at 35%. Of course, crypto hedge funds were an exception, seeing more opportunities for alpha.

Development of financial institutions

Institutional investors have not been the only companies active in the crypto space. Financial giants, like Mastercard and Goldman Sachs, have stepped up their plans to enter the crypto space by integrating new capabilities into existing products or making acquisitions.

Goldman Sachs plans to spend tens of millions of dollars buying or investing in crypto companies after the FTX collapse, according to Reuters. The investment bank sees attractive buying opportunities at attractive prices and is actively conducting due diligence on several companies.

Mastercard recently launched Crypto Source in October, allowing financial institutions to offer their customers secure crypto trading capabilities and services. Through partnerships with regulated and licensed custody providers, Mastercards partners will have access to a full suite of buy, hold and sell services for select crypto assets.

Bank of New York Mellon and NASDAQ are also working on crypto custody platforms for institutional investors and plan to enter the crypto services market. Meanwhile, Franklin Templeton, Betterment, Societe Generale and other wealth management companies have also drawn up plans to launch products in the crypto space.

What’s next for crypto?

The crypto winter and the events leading up to it will likely spur additional regulatory oversight to protect investors. While this may slow some innovation, the move could help more conventional investors participate by providing more confidence in everything from reserves backing stablecoins to the financial status of a token project.

These regulations could also help remove many ambiguities and increase investment in space. After all, 52% of respondents in Coinbase’s survey cited the uncertain regulatory environment as their most pressing concern, which is higher than 48% citing volatility, 36% citing market manipulation, and 10% citing liquidity.

Among other things, these regulations could include much-needed tax advice. The IRS’ ambiguous tax laws regarding digital assets have led to numerous lawsuits and attempts by regulators to get answers. Unfortunately, while the agency has provided some advice, its priorities seem more focused on enforcement to close the so-called “tax gap.”

The essential

The crypto winter has led many retail investors and venture capitalists to pull out of the space. However, institutional investors in conventional finance continue to pour money into crypto assets. At the same time, several major financial institutions are scrambling to acquire, create, or launch crypto trading and custody products.

Most institutional buyers buy crypto assets to fill allocations in digital asset or emerging technology portfolios. Meanwhile, others are buying to generate returns or take advantage of low prices.

Going forward, the crypto industry may see more regulation following the events leading up to the crypto winter. And surprisingly, these regulations could address many of the main concerns of institutional investors. Ultimately, this could lead to more long-term investments.

If you trade crypto assets, ZenLedger can help you aggregate transactions across exchanges, calculate your capital gain or loss, and automatically fill out the IRS forms you need each year. You can even use our tax loss collection tool to identify ways to save throughout the year.

Get started with ZenLedger for free today!

The above is for informational purposes only and should not be construed as professional advice. Please seek independent legal, financial, tax or other advice specific to your particular circumstances.

[ad_2]