Pros and cons of institutional investors coming to the cryptocurrency market
The crypto market is becoming more and more like a traditional financial system. This means that "big fish" will be in charge here. There is a fierce struggle going on now, where the main “fighter” is Coinbase.
In the middle of August, Coinbase announced the takeover of the institutional business, namely, one of the oldest
crypto custodians Xapo. Fortune claims that the deal reached $55 million. Moreover, Fidelity, which specialises in working with whales, was also interested in Xapo. In the end, however, Coinbase offered more and got the custodian business.
According to Coinbase, after the takeover, the crypto assets of its custodial business will grow up to $7 billion. That’s might be compared, for example, with the nominal GDP of such state as Tajikistan ($7.5 billion at the end of 2018).
The fight for Xapo’s institutional clients is still ongoing. According to Fortune sources, most of them agreed to transfer their savings in BTC to Coinbase repositories. Due to that, the total number of bitcoins that are stored by the crypto company jumped to 514,000 BTC.
For example, one of those clients was Grayscale Investment, which manages the bitcoins of wealthy clients. Allegedly, it transferred 225,000 BTC (about $ 2.7 billion) to Coinbase at the beginning of August.
However, the rest of the Xapo institutional clients has not yet decided whether they should transfer their assets (we are talking about an amount of about $ 3.5 billion - ed.) to the crypto
exchange. If Coinbase succeeds in luring them, the company will have 860,000 BTC in its storage facilities, and the total assets in BTC alone will grow to $8 billion. That’s about 5.24% of all bitcoins circulating.
Money supply that big may significantly affect the market, given that the daily
trading volume is now at about $45 billion. At the same time, there are several companies fighting for billions of institutional clients, which are looking forward to enter the cryptocurrency market.
The growth of assets in custodian storages indicates that institutional investors keep looking more favourably at the cryptocurrency market. The infrastructure development, regulatory certainty, and the fact that the industry is becoming more mature are all helping here.
“The constant increase in institutional funds in storage suggests that the interest of large players in cryptocurrency is growing. Since the beginning of the year, the amount of funds in custody storage has increased manifold, ” says Maxim Korkodinov, the head of analytics department at CryptoRank.io.
There are other signals. Just look at, say, Grayscale Investment - the largest crypto asset management company.
“The size of institutional funds allocated in the largest Bitcoin Trust Grayscale has significantly increased. Currently, Grayscale has $ 2.4 billion of institutional funds under investment management, and that’s only in BTC,” the specialist explains.
But the crypto business is also interested in “whales”.
For example, at the end of July, the Kraken cryptocurrency exchange took over Interchange company. It provides various services to institution clients. At the time of purchase, the company had 60 such customers.
Ripple is another example. The project is developing its platform with the goal of fast and cheap money transfers. Institutional clients are its target audience. According to the company, only in the 2nd quarter of 2019, sales of XRP to institutions increased by 73% compared with the 1st quarter, and reached $107 million.
In general, according to Fidelity, 22% of institutional clients in the US hold money in crypto assets. Another 40% are ready to enter the cryptocurrency market in the next five years.
And the situation is clear, since not only the custodial infrastructure is developing, more and more new services are being launched on the market. For example, Bakkt has already announced that it will issue
futures for the physical delivery of an asset on September 23. That may well become a litmus test for determining the sentiment of large investors.
“If, nevertheless, Bakkt successfully launches and there are no unforeseen nuances again, then it will also be possible to track the interest of the institutional investors in cryptocurrency,” says Maxim Korkodinov.
Is it all over for crypto businesses?
Institutional money has a downside. For example, the situation with Coinbase, mentioned earlier.
At the end of 2018, the company held another round of fundraising and raised $300 million. Thanks to that, its value jumped to $8 billion, which made it one of the most expensive companies in the United States.
There is $7 billion worth of crypto assets in the company's custodian storages alone. And if something happens, then a blow to the crypto market will be somewhat comparable with the bankruptcy of Mt.Gox in 2014.
“Based on the history of cryptocurrencies, for example, the hack of the MtGox exchange significantly influenced the cryptocurrency market and its value. I believe that serious problems for exchanges such as Coinbase or Binance can greatly shake the crypto industry,” says Maxim Korkodinov.
Of course, it’s unlikely to affect the global economy, since after all, the crypto industry is still too small.
“There are, however, no systemic risks at the moment, since the cryptocurrency market is not that large to affect the economy as a whole. Within the cryptocurrency market, it may cause a crisis and stagnation for some time. The good thing is that there are a lot of players now on the market and they will be happy to compete each other whenever possible,” the expert believes.
According to him, even if something does happen and investors lose money again, it will remind them that trusting centralised services is always risky. Therefore, as the result, cryptocurrencies and
blockchain will be the ones, who benefit.
Another problem is that institutional investors and large traditional companies can simply put the crypto competitors out of business. After all, their safety and
cash margins are many times greater.
For example, at the beginning of this year, JPMorgan announced the release of its own cryptocurrency. At the end of 2018, the bank managed assets totalling of $2.7 trillion. Facebook with its cryptocurrency Libra is another example. Last year, the social media received $55 billion only in revenues. For comparison, the capitalisation of the entire cryptocurrency market is now equal to $ 266 billion.
So, if there is a will, the “whales” can make the crypto business simply disappear - if not all of it, then at least some major part of it.
“I do not think they will be able to kill the crypto business as a whole, maybe some specific niches, since not all areas of business are interesting for such companies. And also many people now do not support the principles on which the business of such companies is based,” says Maxim Korkodinov.
The arrival of institutional investors is a positive signal. Indeed, without the money of the “whales”, the crypto industry is unlikely to grow into something bigger and compete with other markets.
However, we must take the risks into account. Having companies that are "too big to fail" always ended badly. The crypto industry is no exception here.
You should also carefully monitor the moves of the “whales”, so that the crypto industry does not turn into a “traditional market”.
Author: Alexey Ryabukha