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Institutional investors dipping their toes into crypto

Pension funds, hedge funds, endowments funds make up the bulk of institutional investors getting into crypto investing. More of such types including insurance companies, family funds, investment managers and mutual funds are expected to slowly enter the crypto assets market.

For the most of the 10 years since Bitcoin was introduced, majority of the participation has been by small scale retail investors who buy and sell small amounts of bitcoin and subsequently other cryptocurrencies. Since 2015 more and more institutional investors have been getting into crypto.

the options available

Firstly, The volatile nature of cryptocurrencies means that institutional investors may not be willing to risk billions by investing in cryptocurrencies. It is much easier to take risks as an individual rather than as an institution because losses are likely to affect a larger group of people. Secondly, the industry has largely been unregulated and there has not been a clear and easy way for institutional investors to get into crypto rather than the actual buying of crypto assets directly.

However on the flipside, not taking action could potentially be harmful since the funds could lose out on potential long-term gains. When the uncertainty is over, the crypto assets might have attained higher values and thereby losing on potential gains for investors and investment fund managers.

Subsequently, institutional investors are opting to slowly find ways of getting to understand the industry from inside rather than waiting on the sidelines.

entry points

The over the counter market (OTC) for crypto is growing steadily with  estimation of OTC market handling anywhere between $250 million and $30 billion. Exchanges still take up most transactions with $15 billion in daily trades. With a triple digit growth, the area is becoming very attractive to investors. However, large investors prefer private sales than use of exchanges because

  1. on the exchanges price movement of coins is rapid. In a private sale, the price can be determined before hand thereby reducing the worry about sudden price increase or decrease that crypto is prone to.
  2. In exchanges, investors may not get as many coins as they would like since exchanges could have liquidity issues or limitations in terms of trade volumes per specified period.
  3. current crypto exchange do not have on-boarding and services specifically suited for institutional investors. Simply, individual investors like you and me buys, sell,stores crypto assets in your own way and is responsible for your own storage and security. But for institutional investors they want a proper way of buying and storing that does not involve them managing own custody and private keys, furthermore, the law requires such holdings to be use third-party regulated institutions.

Therefore lack of clear regulatory framework, volatility, lack of clear entry point for large scale investors has kept them away, but they are slowly creeping in.  There are products that have been introduced that would allow such type of investors to get in. They are now in hundreds but here i highlight some of them so that you get the picture of type of operations they are running.

Tagomi:  The company aims to offer better platform for institutional investors to invest in digital currencies. By providing institutional investors with easier on-boarding process by pulling liquidity from different exchanges and finding best prices via algorithms and then charging a commission.

Coinbase Custody: Coinbase crypto exchange is mainly known for retail investors, but it has also diversified into institution clients by acting as agency broker for clients with deep-pockets with coinbase custody.

Fidelity Digital Assets: Fidelity Investment has over $2 trillion in assets under management and decided to dip its toes into crypto last year with Fidelity Digital Assets to provide services for institutional investors. The new arm is expected to be a full-service enterprise platform allowing institutional investors to buy, trade and store digital assets. It is working on developing custody services for bitcoin and Ethereum among other services such as execution services, on-boarding and customer support.

Bithumb: Hong Kong’s biggest crypto exchange opened a Over the counter (OTC) platform to allow institutional investors to easily exchange crypto assets off-the books

BitGo: A blockchain security company that offers services such as cold-storage, institutional grade-policy controls, regulatory compliance and other institutional based services that would allow institutional investors get into crypto. last year, it received green-light to operate in South Dakota.

World’s first crypto asset custody regulation

Custodial services for institutional investors seem to be catching up even in Africa after Mauritius announced world’s first crypto custody regulation in February. Custodial services are important to safeguard investors’ digital assets. Public pension funds, family endowments and similar type of funds do not own the funds under their portfolio but manage them on behalf of clients. In the era of digital assets such as bitcoin, custodian regulation as well better execution platforms are important pillars to ensure the owners are protected.  Cases such as one witnessed with Canadian crypto exchange where the CEO died and there was no way to recover funds in the exchange because apparently he was the only one with the private keys. This leaves questions about whether they had implemented multi-signature wallet system or any security features to anticipate such conditions. No institutional investor would feel safe to invest if such kind of risks exists. Hence the need for proper custodial services and regulation as highlighted above. 2019 might see more of such legislation as well as entities try to set up targeting institutional investors from across the globe.


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