The all time highs of BTC and ETH in 2021 created some of the greatest interest to date in crypto from institutional investors. In 2021 alone, the total assets under management (AUM) of crypto investment funds nearly doubled to $59.6B.
Morgan Stanley, Goldman Sachs, BNY Mellon and other major financial institutions were all early crypto adopters in 2021. As these players expand their operations, it’s estimated hedge funds will hold around $312B in cryptocurrency over the next 5 years, or roughly 7% of their total assets.
Despite current market conditions, institutional interest in cryptocurrencies grows. Blackrock, the largest asset manager in the world, launched an institutional spot bitcoin product. The decision both recognizes that Bitcoin’s market cap still exceeds that of most companies in the S&P 500 and reflects BlackRock’s view there is “substantial interest” in investing in crypto now.
We believe the continued acceleration of institutional adoption of crypto is positive for the market as a whole, driving new opportunities and investments into the space. Specifically, the increase in mainstream, institutional crypto investing has and will spur new products for qualified buyers in digital assets while creating a more mature crypto market, bolstered by a greater degree of regulatory certainty.
New Institutional Digital Asset and Crypto Products
First, increased institutional adoption of crypto will create more investments through new institutional crypto products. Many of the investment products in the traditional market today are only now becoming available for the crypto market. It wasn’t until the end of 2021 that we saw the first Bitcoin ETF launch in the United States. While the ETF is based on futures and not the bitcoin spot market, the ETF’s launch is nonetheless a major step in the right direction. As more institutional investors seek these traditional-style products in the crypto market, more products will be created and more investments will result.
Further, there are many specific features of crypto, such as staking or liquidity protocols, that don’t exist in traditional financial markets. For example, staking provides holders of assets with a Proof-of-Stake consensus mechanism with the ability to earn a yield.These products are becoming more available to institutional investors, bringing more capital into the market than ever before. We are still early in the institutional investing cycle, and future use cases will inevitably bring new crypto products not even imaginable today.
Mature Crypto Market
In addition to the rise of new institutional crypto products, institutional involvement in the crypto market will inevitably lead to a more mature market. The entrance of traditional, regulated financial institutions brings confidence to a market that has thus far been driven by retail investors and a lack of regulatory clarity. In turn, that same capital will have a positive effect on the market as a whole through further increasing the participation of qualified investors and furthering the conversation on regulatory clarity.
Market maturity through institutional adoption occurs by reducing volatility and defragmenting liquidity. First, institutional investments can help reduce volatility through crypto products like ETFs and IRAs by creating a greater number of long-term holders. When the crypto market is dominated by retail investors, many without long-term objectives, huge swings in crypto prices are par for the course. In maturing through reduced volatility, the result of another Black Thursday-type event seems less likely. As the market continues to mature, we should see reduced volatility and an increase in confidence among both institutional and retail investors.
Additionally, continued institutional adoption will mature the market by defragmenting liquidity. The current state of crypto liquidity has created wide spreads that can lead to unnecessary slippage and volatility. Institutional participation will support the consolidation of current liquidity through increased capital and investments into better ways to navigate the liquidity landscape. As institutional players help consolidate liquidity, the market will benefit from narrower spreads.
Increased trading volume also will benefit the market. With higher buying and selling pressure, the spread price between orders can be reduced, making investors more confident in their purchases. Further, increased trading volume has historically been a positive signal for investors when entering a particular market. As the market evolves with more institutional investors and institutional product offerings, increased trading volume and reduced volatility will incite new investments and support for the crypto market.
The crypto market may have been a rollercoaster ride of late, but a more efficient market structure and regulatory clarity and oversight for digital asset markets are in progress. Lessons learned, market movements and new product offerings all support a healthier crypto market.
Fidelity announced an upcoming BTC 401(k) offering, providing increased exposure to crypto for anyone saving for retirement. By doing so, they created a conversation about BTC, and the entire crypto market as a store of value. This dialogue lends itself to the larger discussion among regulators and everyday people looking for a clear path toward the future.
These high-level conversations around new, innovative crypto products lead to a more educated regulatory environment. In turn, greater education leads to a more mature regulatory environment, painting a clearer picture for institutions when deciding to put their money into crypto.
From the start, Protego Trust has sought the highest level of regulation, understanding that institutional investors both need and want that level of confidence. Last February, Protego received conditional approval for an Office of the Comptroller of the Currency (OCC) Charter and is working on receiving approval for its full charter.
Protego Trust Bank N.A (in formation) is a purpose-built, conditionally federally chartered trust bank, exclusively serving the needs of institutional clients. With a firm belief that the future of all assets is digital, Protego Trust is defining the next generation of financial services by providing regulated infrastructure, advanced technology and safeguards that allow institutional clients to securely participate in cryptocurrencies and digital assets. In 2021, Protego Trust received a conditional federal charter from the U.S. Office of the Comptroller of the Currency, in addition to its Washington state charter. It plans to launch in 2022. Learn more about our institutional custody solutions today.