What Shapes the Future of the Institutional Crypto Market?

  • Mar 18, 2022 at 11:08 am
  • 2021 is a big year for cryptocurrencies. El Salvador was the first country to adopt Bitcoin (BTC) as a legal tender. In November 2021, the bitcoin price hit an all-time high, approaching the psychologically significant estimate of $70,000. And meanwhile, industry leaders like Elon Musk continue to tweet their enthusiasm for cryptocurrencies. I think 2022 will continue to be an even bigger year for digital currencies as the market grows to 1 billion people. Here are the top five trends I see on the horizon for next year.  Institutional trading volume will grow  2022 will be a year where institutional and commercial acceptance of cryptocurrencies and especially trading will continue to increase. Fintech backers PayPal and Square — along with mobile trading platform Robinhood — have made it easy to buy, sell, and trade cryptocurrencies. And publicly traded companies like MicroStrategy, Tesla, Galaxy, and Square have added large amounts of Bitcoin to their 2021 balance sheets.  What is driving this growth? The bullish momentum aside, two pieces of evidence reflect the continuing maturity of the institutional crypto market: market cap and infrastructure. In 2015, the total market capitalization of cryptocurrencies was around $5 billion. By December 2021, it had grown dramatically to over $2 trillion. Bitcoin alone had a market cap of $3.6 billion as of January 4, 2015, and its current market cap is around $900 billion. Even the market cap of the number two cryptocurrency, Ether (ETH), which has a larger enterprise application ecosystem, is around $400 billion, which is close to Visa or JP Morgan Chase.  Just five years ago, the basic infrastructure in crypto was much more developed. Institutions are struggling to find ways to store, trade, and delete and settle crypto transactions in a reliable and compliant manner. There is no truly top crypto broker. Now the infrastructure is much more developed and institutions have a better understanding and level of comfort with the crypto landscape. Therefore, I assume that institutional trading will continue to grow. However, spot trading volume in crypto, specifically bitcoin, is still highly fragmented.  Institutional acceptance will also accelerate the growth of the crypto derivatives market. There will also be more regulation, which is a very positive development as long as it covers public discourse and is adapted to industrial products to enable adoption and innovation while still meeting the needs of regulators. In July 2021, Treasury Secretary Janet Yellen urged regulators to act quickly to create a regulatory framework for stablecoins. Since then, US Securities and Exchange Commission (SEC) Chairman Gary Gensler has also called for regulation in this area to be on the SEC’s agenda.  Further service providers and institutional tools will enter the market  However, institutions desperately need the right services and tools. There is a surge in activity among startups looking to provide support services such as crypto asset storage, security and management and investment products, as well as hardware and software sourcing and payment infrastructure. Many companies have raised at least $300 million in funding circles by August 2021, including Blockchain.com, BlockFi, Fireblocks, Ledger, and Paxos. I hope this continues as new companies emerge to make the crypto market more accessible than ever. This in turn opens new doors for small and medium-sized funds.  Altcoins are becoming more and more popular  Next year I also anticipate the popularity of altcoins as enthusiasts learn more about their various uses. Ether (ETH), for example, is supported by DApp development with a stable ecosystem. However, due to Ethereum’s scalability issues and high gas costs, it is also caused by newly built blockchains such as Solana (SOL), Cardano (ADA) and Avalanche (AVAX). Investors see tremendous growth opportunities while traders see opportunities for volatility and arbitrage between pairs.  In general, I expect altcoins to become more popular as investors look for ways to diversify their crypto wallets. The Nasdaq report noted that as of October 2021 there were more than 100 altcoins worth over $1 billion, [indicating] a thriving digital ecosystem. While altcoin prices can be just as volatile – and investors need to do some research first – many altcoins, including Solana and Polkadot, remain on the list of cryptocurrencies with the greatest potential to become the next big thing.  Volume will shift from bitcoin to ether altcoins and have started to change. For more evidence, check out digital currency asset manager Grayscale Investments, which recently added a Solana-focused trust to its portfolio of investment products. “We have pioneered mass adoption and adoption of cryptocurrencies and are increasingly finding that investors are diversifying their exposure beyond digital assets such as Bitcoin and Ethereum,” said Grayscale CEO Michael Sonnenshein in a recent statement.  “Our Grayscale product family will continue to grow with this attractive asset class as we remain committed to providing investors with access to the digital economy.  DeFi set up for institutions is just around the corner  Decentralized finance, or the emerging financial application ecosystem using blockchain technology, will have a big year in 2022. Total Locked Value (TVL) in DeFi has grown significantly in 2021.   To date, institutions have remained on the sidelines of DeFi as the counterparty to DeFi transactions is largely unknown. Whether an institution wants to become a Liquidity Provider (LP) or trade on a Decentralized Exchange (DEX), clarity and regulatory compliance are paramount. Because of this, Aave released the official DeFi platform, Aave Arc. In most DEXs, LPs are not required to pass compliance tests such as: B. Customer Knowledge and Anti-Money Laundering Requirements. Looking ahead to 2022, I expect DeFi’s growth to accelerate. Two challenges may be addressed: a lack of regulatory clarity and a lack of counterparty compliance checks.  More regulatory clarity is likely to emerge as the SEC and other regulators provide new guidance. And new institutional DeFi platforms will gain popularity. The platform requires LPs and traders to pass compliance checks and provides sufficient liquidity to institutions. With more clarity and a suitable platform, more institutions will enter the DeFi space.  Security solutions are becoming more and more common  Hacking has long been a part of crypto history. In 2014, for example, the bitcoin exchange Mt. Gox filed for bankruptcy after hackers reportedly stole millions of dollars. Four years later, hackers stole Coincheck from another cryptocurrency exchange. And in August 2021, DeFi platform Poly Network lost $600 million to hackers. Even earlier, MonoX Finance, another DeFi platform, lost $31 million.  Crypto exchanges are now starting to take steps to protect themselves and are willing to work with qualified trustees to manage trust risk. For example, in November 2021, Coinbase acquired crypto company Unbound Security to enhance its versatile computing capabilities. PayPal also acquired another digital asset security provider, Curv. I expect a similar deal in 2022. The crypto industry is moving fast with many twists and turns. But one thing is certain: the signs for 2022 point to further growth.