Benzinga - Cryptocurrencies and digital assets are attractive instruments for investing and trading. However, there are several factors holding institutional and corporate traders back from the cryptocurrency market. For instance: a lack of regulation, a high risk of hacking and fraud with no tools for fund protection, market instability, and a lack of products that could provide security and high-profile trading. Can solutions to these challenges be found?
Major Problems of Institutional and Corporate Clients in Cryptocurrency Trading
In 2017, a significant bull run in the cryptocurrency market triggered a dramatic increase in the number of institutional investors. The cryptocurrency industry continued developing, so more firms were entering the market.In 2022, before the collapse of the FTX cryptocurrency exchange, Fidelity Digital Assets surveyed 1,052 global institutional investors. According to the survey, they develop trust in digital assets, including cryptocurrencies – 58% of respondents invest in digital assets. US companies were more skeptical than European and Asian investors, with 71% considering digital assets as a part of their investment portfolio. Still, the percentage was high.
Particularly, financial advisors start to consider cryptocurrency as investment more often. According to the Bitwise survey, the number of financial advisors who allocated client funds to digital assets increased from 6% in 2020 to 16% in 2022. At the same time, the advisors are actively investing their personal funds into crypto assets, with their number increasing from 17% in 2020 to a whopping 47% in 2022. Besides financial advisors, large businesses also often invest in Bitcoin. According to Bitcointreasuries.net, 40 publicly traded companies keep Bitcoin on their balance sheet. While their number isn't high, the total investments stand for around 1% of the Bitcoin supply.
However, there are still barriers to traditional hedge funds. The share of digital assets in their investments is minor, 4%, where over half of the funds have a position of less than 1% of their AuM, but it's growing. According to the 2022 report by PwC, 1 in 3 hedge funds invested in cryptocurrencies in 2022 compared to 1 in 5 funds investing in 2021.
However, enormous market volatility, instability of the cryptocurrency market, and regulation issues, which led to the bankruptcy of FTX, resulted in a plunge in the crypto market capitalization. According to CoinMarketCap, the total cryptocurrency market capitalization dropped by around 73%, from $2.97 trillion in November 2021 to about $811 billion as of December 23, 2022. As of April 26, 2023, the market capitalization partially recovered to $1.28 trillion. However, it's much lower than in 2021.
The FTX bankruptcy wasn't the only problem of the cryptocurrency market in 2022, but this event affected institutional investors the most. In March 2020, the cryptocurrency exchange held a $900 million round of series B funding, the largest deal out of the previous five years in the cryptocurrency and DeFi sphere. Around 60 investors participated, including Sequoia Capital Operations LLC. In October 2021, there was another funding round, during which FTX raised $420.7 million. The Ontario Teachers' Pension Plan Board invested $95 million then.
Still, according to the report by Nickel Digital Asset Management, regulation is not the primary concern of institutional investors and traders. 50 institutional investors and 50 wealth managers from the US, the UK, France, Germany, and the United Arab Emirates cited security as the main reason for avoiding crypto and digital asset investments. 79% of respondents agreed that asset custody is the major problem of the cryptocurrency and digital asset sphere.
The second reason that holds institutional investors back from entering the cryptocurrency market is the high volatility of crypto and digital assets. Institutions and corporations require more sophisticated methods of risk management than retail investors. Basic market orders aren’t enough for institutional and corporate traders, as they apply higher requirements to strategies. Institutional investors require infrastructure that allows them to cross-collateralize positions and implement effective risk management. There are few institutional-grade products that can enable highly effective risk management.
Market capitalization is also a concern for corporations. The regulatory environment is the fourth reason institutions don’t enter the market.
What Holds Institutional Investors Back From the Cryptocurrency Market: In Details
Security, regulation, market volatility, and market capitalization are only the tip of the iceberg. Institutional and corporate traders struggle with many other aspects of the cryptocurrency market.History shows that even large cryptocurrency exchanges can collapse; FTX was the third-largest exchange by trading volume. The number of cryptocurrency exchanges is growing exponentially, further exacerbating custody issues. Not all exchanges can offer insurance coverage, meaning that if a trader is hacked, their funds will be lost forever without indemnification. Institutions require robust security and must conduct thorough due diligence on counterparties due to fraud and hacking risks.
As institutional traders deal with different cryptocurrency exchanges, they face a problem of low liquidity, which results in wide spreads, delays in order execution, unfavorable prices, and differences in pricing throughout exchanges.
Although many institutional investors already operate in the market, deposits and withdrawals in fiat currencies remain an issue. A few exchanges support standard banking payment systems. Institutional and corporate investors deal with complex reporting requirements and tax implications, which are only possible with legal fund transfers. Moreover, the principle of decentralization and anonymity of cryptocurrency and digital asset transactions makes it difficult to audit transactions.
Institutional and corporate traders deal with significant funds and consider different exchanges for investments. This raises a problem of operation management because the market doesn't offer reliable trading terminals with a wide range of exchanges. At the same time, the terminals that offer a variety of exchanges can't brag about sophisticated risk management systems and flexibility in account management tools. Still, such terminals don't solve another issue institutional and corporate clients face – registration, onboarding, and API key management. Traders encounter enormous operational costs and are subject to security issues due to the human factor.
Another issue with cryptocurrency products is that APIs make cryptocurrency trading resource-intensive. The lack of a unified API requires institutions to hire many IT specialists to keep APIs to different exchanges running.
Can the Problems of Institutional and Corporate Traders Be Solved?
According to an Institutional Investor Custom Research Lab survey, US institutional investors cited security, regulatory compliance, and trust as crucial factors when selecting a crypto partner.Single Broker solves all problems that institutional and corporate traders can face. It is a financial institution based and regulated in Switzerland, one of the most reliable jurisdictions for cryptocurrency operations. The risk of money loss is liquidated, as traders access cryptocurrency trading within the platform’s framework and a closed wallet system. Each account has a segregated wallet on custodial storage. A trader interacts with all exchanges through custodial storage, and each account is connected to a sub-account of the exchanges. Additionally, the company provides insurance coverage for each client, regardless of the deposited amount.
The problem of low liquidity is solved by the implementation of the aggregated order book, which reflects both ask and bid prices for each available exchange. As a trader’s account is directly connected with the sub-account on an exchange, a trader sees actual prices without hidden commissions and spreads. Aside from cryptocurrency payments, Single Broker provides deposits and withdrawals in fiat currencies.
Single Broker combines various centralized and decentralized exchanges, DeFi instruments, including liquidity pools and staking, and OTC platforms in one interface, so traders don’t need to open numerous accounts. The interface is customizable, and a trader can easily set up the working space according to their preferences.
For risk management purposes, traders can access a portfolio tool, which helps them track balance, allocation, trades by asset, and trades by exchanges. Also, traders can access the balance history and P&L history by day or cumulatively. Furthermore, traders can download financial statements that can be used for tax and regulation purposes. Reports are available in Excel documents and for the following categories: spot trades, futures trades, futures fundings, swaps, liquidity pools, and transfers. The statements are free and are created within a few minutes.
The platform supports an account-sharing feature. A trader can share account management rights with other platform users. The rights are customizable, so a trader can control what other traders can do. For instance, you can share rights for placing orders, transferring funds between exchanges, checking your portfolio, making deposits and withdrawals, using DeFi instruments, and checking/downloading statements.
The Single Broker platform provides a unified API that allows traders to manage their accounts without using the Single Broker interface. An API key can be inserted into a trading strategy, used for algo trading, or even used for establishing a crypto startup or other investment products based on the Single Broker platform.
Final Thoughts
Institutional traders and investors have entered the cryptocurrency market. However, they have difficulty finding partners that can enable safe trading with advanced risk and account management tools, a friendly interface, and time-consuming tools for trade management. Government regulation won’t be that important if institutions can find reliable partners.This post was authored by an external contributor and does not represent Benzinga's opinions and has not been edited for content. This content contains sponsored advertising content and is for informational purposes only and not intended to be investing advice. Cryptocurrency is a volatile market; do your independent research and only invest what you can afford to lose. New token launches and small market capitalization coins are inherently more risky than large cap cryptocurrencies. These tokens are subject to larger liquidity and market risks.
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