Crypto Stability: Institutions On the Horizon?

Cryptocurrency volatility has long been one of the industry’s biggest talking points, and for good reason. Since its launch and the subsequent explosion in popularity, bitcoin—and the market it spawned—has been characterized by unpredictable swings and price booms that lead to major collapses. Even so, the major price crash that started 2018 has led to a relative stabilization of the crypto sector, and with it, the potential for real growth and adoption.

One of the biggest factors that could push crypto over the top in terms of mass adoption and legitimacy—though one that has not been forthcoming—is serious investment by institutional players in finance. Although there is already money pouring in from these sources, sentiment across the sector appears to be hesitant at best. Much of this comes from the risk factor that accompanies volatility.

For companies beholden to delivering returns for investors, the likelihood of losing millions of dollars in minutes has been a major sticking point. Nevertheless, with bitcoin having spent several months trading within a relatively stable range amid real efforts to regulate the market both internally and externally, it seems the floodgates may finally be opening for institutional money to pour in.

Institutional investors have remained largely on the sidelines of the crypto revolution for a variety of reasons. From a lack of regulation to the risk factor and its bad reputation, most firms cannot justify a large investment to their stakeholders. While the sector has been anxiously awaiting a flood of institutional money that has yet to materialize, these very investors have shown signs that they are interested by slowly dipping their toes in the water.

Yet, the market’s current price trends may be an omen that the tide is finally turning for the better, opening the doors for real investors. The industry has slowly been on pace to stabilize over the course of the year, and a confluence of factors are finally having a calming effect on prices and the industry in general.

The first is a real push towards disconnecting from the “Wild West” stigma that has overshadowed the industry since the days of the Silk Road and stories of bitcoin being employed for nefarious purposes. Internally, groups have been formed to regulate the market. The Winklevoss twins’ self-regulatory Virtual Commodities Association denotes the collaboration of several important crypto exchanges and marks a sign of greater internal oversight that could draw in prospective investors.

More importantly, governments have also begun providing clearer guidelines on the industry, helping assuage investors’ fears. According to David Wills, COO of Caspian, an institutional grade crypto trading platform, the matter of regulation is vital as “investors need clarity and consistency, and regulators worldwide have thankfully been gradually providing this.”

Companies like Caspian are clearly preempting the influx of investors and institutions by building a complete crypto asset management platform for both funds and traders, interlinking all major crypto exchanges with access to trading algorithms in real-time. Coinbase, perhaps most famously, launched a platform for institutional products.

According to Wills  “this kind of collaborative approach is prompting appropriate regulatory efforts in several other jurisdictions, which in turn has opened some pathways to help more institutions enter crypto. Gradually, the U.S. environment is becoming clearer, too, despite the complexity of navigating a patchwork of agencies.”

In addition to regulation, investors have simply had their hands tied due to logistical matters within the industry.  The matter of custody—how to safely store large amounts of money, or in this case cryptocurrencies—has been problematic for the industry. Most large banks and financial services institutions have been unwilling or unable to help. This means that institutional investors have had to rely on until now, largely unproven third parties that are not always fully transparent or secure enough. However, as more companies strive to provide a reliable custody solutions for institutional funds, these very investors are gradually exhibiting greater willingness to expand their allocations.

Liquidity has also been an issue for investment funds considering the highly fragmented market regularly experiences trade execution issues. Traditionally, institutional money provides a foundation for asset classes by generating liquidity and providing greater stability. However, crypto’s deregulated and disparate technology infrastructure means that liquidity is hard to come by and consequently generates volatility.

Nonetheless, the market has been steadily working to provide solutions that dispense with the unstructured nature of the crypto market by shifting the focus towards delivering full-stack solutions. This ensures that institutional investors can access multiple exchanges in one location, reducing the liquidity problem while ensuring that cryptos are treated more similarly to traditional asset classes.

Overall, this new push for legitimacy and greater stability is a key sign that the crypto market is maturing—a trend borne out in the reduced volatility of prices. While some of the reduced volatility is attributed of lower trade volume, Wills argues that much of it has to do with “the consequence of the tempering effect of this institutionalization of crypto from mechanisms such as futures trading.”

Institutional money will likely be a stabilizing force for cryptocurrencies. While this influx of cash and attention is unlikely to completely drive the volatility out of the market—a good thing considering it provides excellent opportunities for smart institutional funds—it will help temper the sector’s chaotic nature.  

As it moves past its infancy, cryptocurrency is seeking to be a legitimate force in the financial world, and new technologies and developments are helping push this narrative. As the asset class matures and investors continue to join, cryptocurrency’s evolutionary momentum will accelerate, helping the asset class achieve greater mainstream visibility and subsequent adoption.  

“The word has to get out that the custody, liquidity, and technology solutions are here and working and that the regulatory environment is increasingly clearer. There was a perception issue that crypto, as a nascent asset class, lacked solutions for professionals. But the institutions just need educating so that they know they can treat crypto pretty much like any other asset class. Crypto has been a market where many people made money while the institutions remained sidelined, but that story is part of the past. Now institutions increasingly see themselves participating more and more in crypto’s future,” Wills concludes.