Rising Institutional Investment Setting Pace For Future Crypto Growth

Financial institutions have begun to enter crypto with a quickening pace, setting the tone for the remainder of 2019 and 2020.

What makes these years different from ones prior is the speed of professionalization taking place in the markets, according to our sources.

Oliver von Landsberg-Sadie, CEO of BCB – a financial services group with digital asset specialism, drew comparisons on the various bull runs experienced over bitcoin's (BTC) lifecycle, with the exception given to this year's fundamental growth.

“The 2013 bubble was driven by technocrats and dark web trawlers and the 2017 rally was led by the whims of speculative retail traders, 2019’s growth belongs to financial institutions who are diversifying stale portfolios and finally have the professional machinery to do so.”

Last month in the UK alone, 9 financial institutions for banking and over-the-counter (OTC) trading were brought into the fold by BCB. That raised the count to 32, most of whom came onboard this year, says Landsberg-Sadie.

“This is a fundamental shift in client profile compared to last year which was dominated by crypto projects looking for liquidity.”

On the horizon

Indeed, crypto has been experiencing some of the largest levels of institutional growth as seen with bitcoin futures open interest and volume as well as a number of established banks issuing their own cryptocurrencies on their private blockchains.

In addition, these financial institutions are supporting a variety of blockchain projects focused on commodity trade finance and shipping, says Kari S. Larsen, a partner at Perkins Coie’s Blockchain Technology & Digital Currency group based in New York.

“Exchanges are changing their focus from retail traders to institutional traders, providing such customers better ability to customize the front end of their trading platforms and providing APIs that better suit what institutional traders are used to.”

Institutional investors rely heavily on regulated products and processes, organizations rely on steady progress on the regulatory front as well as infrastructure improvements, which directly affects the pace of institutional involvement.

However, the pace from financial regulators, at least in the US and parts of the EU, when it comes to providing guidance and licenses for entities seeking to focus on digital assets, has been very slow.

The Financial Industry Regulatory Authority (FINRA), for example, appears to be moving very slowly with broker-dealer applications from companies seeking to provide services supporting security tokens or related crypto products says Larsen.

Although, that is beginning to change mostly due to Facebook’s recent announcement on entering into crypto and the subsequent pushback from regulators on a global scale.

This has been reflected in BTC's violent price swings in recent weeks, amplifying the discussion amongst regulators about what must be done about that 'crypto issue'.

Setting the Stage

Facebook’s battle with regulators is sure to set the stage for crypto moving forward as the nuts and bolts of the regulatory framework are metered out.

With the potential advantage of on-ramping billions of users to digital assets through its Libra/BTC pairing, it can be argued that crypto poses a threat to traditional finance in a number of ways.

Therefore the time has come to tread carefully as over-regulation could put an immediate stop to bullish advances reflected in BTC's latest price swings. Peaking at $13,880 on June 26 during a strong uptrend, BTC fell to a low of $9,950 before shooting back up to where it currently stands at $10,550.

Still, progress continues as the Commodity Futures Trading Commission (CFTC), the United States’ regulatory agency with jurisdiction over futures markets, grants ErisX Clearing a derivative clearing organization (DCO) license under the Commodity Exchange Act (CEA).

Rules and regulations take time to hash out but eventually the goal is to arrive at a happy medium that provides a stable platform to trade digital assets while encouraging fair trade and reducing risk.

There is a level of finesse when it comes to new markets as regulators scramble to make sense of crypto and how that fits into the current global financial model. The key here is to let the golden goose run free, careful not to implement too many restrictions while also reaping the benefits.

Month-to-month market capitalization

The monthly chart above reveals interesting insights into the total market cap experienced by the industry as of late, demonstrating its overall recovery which is nearing 50 percent retracement from the 2018 bear market and made headway amid another strong weekly showing in the form of large buy orders during June 1-June 30, suggesting these moves involve more than just the average trader.

A resurgence began on February 1 of this year when the total value closed above $130 billion for the first time in over two months, marking a strong shift in sentiment and trend with a hint of institutional interest.

Since then, the upward trajectory has been checked by steady increases in growing (bullish) volume seen by the large bars on the monthly chart, backing the trend.

Now above $300 billion, growth seems very plausible, given crypto’s recent bullish fundamentals, however, that will also depend largely on how the industry navigates the upcoming regulatory framework.

Disclosure: The author holds no cryptocurrency at the time of writing.

Bitcoin businessmen via Shutterstock, charts by TradingView