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CEO and Co-Founder of Ionixx Technologies Inc., leading the company’s cross-functional teams located in the United States, India, Singapore and Canada
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As 2020 made history as the year of the pandemic, something remarkably important has happened in cryptocurrency circles. The value proposition of crypto assets has strengthened even as the world faces economic catastrophe.
What do I think of this? Well, for starters, it looks like the Covid-19 pandemic has accelerated the trend of institutional investors to break out of their skepticism to embrace crypto assets as a new and useful asset class. What could have started this change of perspective? The answers are pretty straightforward.
When you include an uncorrelated asset such as bitcoin in your portfolio, risk-adjusted returns have the potential to be significantly above average, which is why such assets can help balance your portfolio. Portfolio diversification has become a critical aspect for institutional investors to remain relevant in the changing dynamics of the financial landscape affected by the pandemic, and crypto investments can bring variety to the equation. Even central banks around the world are planning to launch their respective cryptocurrencies, and regulators are looking to follow dynamic trends in the crypto market.
I think it’s quite safe to say that bitcoin is not going anywhere. It’s here to stay.
Institutional investors still need to get the most out of crypto as an asset class
Given the current scenario of the crypto market, it is strange that a representative sample of institutional investors are still shy when it comes to crypto. More intriguing are the surprisingly different views they hold regarding the future of cryptocurrencies. Some investors believe that crypto is a fad and that the crypto bubble will burst soon.
I do not agree. Years of experience in the industry tell me that this point of view is far from the truth.
Why else would the Wall Street biggies be interested in bitcoin amid the market volatilities spurred by the pandemic? You also wouldn’t see a financial giant like a BlackRock, Goldman Sachs, or JPMorgan getting involved. Despite unfavorable investor behavior, One River Asset Management invested significant amounts of money in bitcoin and ether last year.
The interest of these companies in crypto assets could pave the way for more and more institutional investors to join the crypto-trading movement.
User experience is a barrier to greater institutional adoption
So what is it that holds so many institutional investors back? Are they doubtful of the implications of an extremely volatile crypto market, or are there other reasons for their resistance?
My company, which works as a fintech partner with multiple clients to make crypto adoption a less daunting task, has discovered that clients are troubled by the highly fragmented nature of the crypto asset class.
And in my experience, institutional players generally expect the same level of ease from crypto exchanges that are provided by regular fiat exchanges, which cover a range of services, including an industry-recognized API for standard connectivity, low latency levels, support for multiple commands. multi-asset types and classes, reliable market data, multi-broker sessions, etc. Providing them to investors is a huge challenge for crypto exchanges. Additionally, institutional investors often look to cash settlements rather than other derivatives, which limits the choice of exchanges through which they could operate.
In addition, crypto exchanges must run on the required services and infrastructure that help institutions better manage crypto assets and fiat currencies between custodians, banks, OTC traders, and exchanges. These processes often expose customers to unwanted operational burdens and risks.
Then there are the regulatory issues to consider. Policymakers around the world are considering stricter crypto regulations, which would make crypto investing more lucrative for institutions. It would also mean that crypto exchanges would require more comprehensive business and market data collection and reporting for their customers.
How Crypto Exchanges Can Simplify Institutional Trading
To better serve institutional investors, crypto exchanges should focus on improving the user experience. Coinbase, for example, has developed a range of products for professional investors, including live market data, custodian services, algorithmic orders, and advanced trading tools.
That said, institutional investors face serious hurdles when operating through crypto exchanges in terms of trade counterparty and operational and security risks. There are hardly a handful of crypto exchanges and OTC players that meet the basic political requirements of institutional asset managers.
The crypto economy has recently focused on the security risks associated with cryptographic private keys. This is precisely why some secure crypto exchanges have implemented custody solutions for their clients. These would be robust enough to meet the specifications of institutional crypto investors.
Investor protection regulations also significantly hamper the institutional adoption of these digital currencies. This calls for crypto exchanges to address these areas of asset management in particular. In a relatively nascent industry, regulators have struggled to define, legislate and tax digital assets. To stand out from other exchanges, user-friendly exchanges must be based on licensing and compliance.
Overall, once the main concerns are addressed, crypto exchanges would be able to simplify the trading processes for holders of institutional crypto assets and, I believe, encourage wider adoption.
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