Crossing the Chasm: The Surge in Institutional Adoption of DeFi

It provides a general overview of the news-worthy institutional investments over the past year and a categorization of use cases of such investments as we observe them. Digital assets are losing their hedging benefit just as more institutional investors enter the crypto world. Managed Account Platform including access to a carefully selected menu of proprietary and independent managers and passive/active investment strategies; bespoke portfolio construction; and ongoing monitoring and risk management oversight. Ledgible digital asset tax and accounting platform is a comprehensive solution for institutions and enterprises looking to navigate the complex world of digital asset investing, compliance, and management. SOC 1 & 2 Type 2 certified, the Ledgible platform provides a high level of security and trust. Out of step with its share of the overall crypto markets, Ethereum institutional investments saw minor inflows on the week.

But the correlation between the two d to 0.33 between February 2021 and July 2022, a period of relatively high volatility. The correlation between Ether and the S&P 500 also rose from 0.04 between 2016 and 2021 to 0.38 during the latter period. The study also found that crypto assets followed the market’s lead even more closely during periods of high market volatility, such as the Covid pandemic and Russia’s invasion of Ukraine. The rise of institutional investors in crypto may be to blame for the breakdown in diversification benefits. The asset class volatility still poses a challenge to money managers, noted JPMorgan’s head of institutional portfolio strategy.

Investment Solutions

This has led to a growing interest in cryptocurrencies among institutional investors, who are looking to diversify their portfolios and potentially earn higher returns. Another example of institutional investment in crypto assets is the investment made by Yale University’s endowment fund. In 2018, Yale’s endowment fund made a significant investment in the cryptocurrency asset manager, Paradigm.

The crypto winter began in May 2022 with the collapse of TerraUSD ($UST) and the sister coin backing it, Terra ($LUNA). In addition to erasing $40 billion in value, the collapse had a knock-on effect on other crypto projects relying on the stablecoin. It is important to note that diversification does not guarantee a profit or protect against loss. As with any investment, it is important to thoroughly research and understand the risks and potential rewards before making any decisions. Cryptocurrencies use advanced cryptography to secure their transactions, making it nearly impossible for hackers to compromise the system.

Crypto investment use cases — Finoa’s perspective

However, there are efforts being made to increase the security and stability of the market. For example, the development of stablecoins, which are cryptocurrencies pegged to a stable asset such as the US dollar, has helped to reduce the volatility in the market. Another reason for the interest in the crypto market is the increasing adoption of cryptocurrencies by mainstream businesses. Many companies, such as PayPal and Visa, have started accepting cryptocurrencies as a form of payment. This trend is expected to continue as more businesses see the benefits of using cryptocurrencies, such as low transaction fees and faster processing times. Mid-2022 Asset Allocation & Investment Strategy Outlook We explore the market implications of central bank policies, rising prices, and slowing growth and offer incremental steps to improving a portfolio’s return potential.

• And even large cryptocurrencies, like Bitcoin and Ethereum, have yet to recover from the losses.
• This report focuses on the crypto institutional adoption of crypto from the perspective of Finoa as the leading crypto custodian in Europe.
• There are a number of different custodial service providers available, each with their own unique features and offerings.
• Crypto fund investments in 2022 were the lowest they’ve been since 2018, according to a new CoinShares report.
• Furthermore, Grayscale believes that GDIO is not a commodity pool for purposes of the CEA, and that Grayscale is not subject to regulation by the CFTC as a commodity pool operator or a commodity trading adviser in connection with the operations of GDIO.
• Robin Vince, BNY Mellon CEO, noted that “client demand” was the “tipping point” behind the launch of institutional-focused crypto services, Cointelegraph reported.

He then introduced a subsequent bill in December, shortly before retiring from Congress, in an effort to inspire future legislation, he said. “I think that what the focus has been is on potential for legislation, and that the administrations and the commissions will continue to work with legislators on moving the various bills that are already introduced and in play forward,” Ms. Larsen said. MetaMask Institutional Introduces Programmatic Access for OrganizationsProgrammatic access will allow organizations to connect to Web3 through their own APIs. It will enable them to create scripts to complete complex execution strategies on various DeFi protocols, and to build, customize and automate scripts to speed up transaction crafting, confirmation, and signing. In June 2021, Microstrategy added more Bitcoin to their balance sheet, bringing their total to over 105,000 Bitcoin. CEO Michael Saylor recognized the role of Ethereum in the disruption of traditional finance.

By using data to analyze trends and patterns, investors can identify opportunities and risks that might not be immediately apparent based on subjective analysis alone. One question that many investors face is whether to opt for active or passive management of their crypto assets. One reason for this interest is the potential for high returns which attracted many investors who are looking for alternative investment opportunities. The crypto market has the ability to offer significant returns in a short period of time.

These models can be used to analyze large amounts of data in order to identify patterns and relationships that might not be immediately apparent to the human eye. Mr. Murray said achieving regulation could lead to mass institutional adoption of crypto. According to several players in the crypto industry, the collapse of FTX was the case of a single bad actor, and shouldn’t be attributed to the broader blockchain technology.

What’s Next for Crypto?

Once the crypto institutional investors strategy has been determined, the asset manager will identify the specific cryptocurrency assets that align with the strategy. This may involve conducting thorough research and analysis of the market, the underlying technology, and the financial performance of the assets. Leaders of the Senate Agriculture Committee introduced the Digital Commodities Consumer Protection Act in August, which would allow the CFTC to regulate the trading of digital assets that act as commodities, such as cryptocurrencies bitcoin and ether.

An asset class once seen as risky and confusing has become an area of opportunity, and institutions are keen to find their place in this growing industry. Fidelity hired a firm to survey 1,052 global institutional investors during the first six months of 2022, and 81% of the respondents indicated they saw some role for digital assets in investment portfolios. At the time of writing, the global cryptocurrency market cap was just under $860 billion. However, the report highlights the elevated volatility as a desirable opportunity for these institutional investors to produce additional profits or alpha. For institutional investors, the security and reliability of custodial services are of utmost importance.

One way ETC to diversify your crypto portfolio is by investing in different types of cryptocurrencies. While Bitcoin is the most well-known and widely traded crypto asset, there are thousands of others available, each with their own unique features and potential. For example, Ethereum is a smart contract platform that enables the creation of decentralized applications, while XRP is a digital currency designed for international payments.

Cryptocurrencies continue to make headlines as investors consider their applications for everything from the metaverse to inflation to the conflict in Ukraine. In addition, the Biden administration’s recent executive order on digital assets signals a positive step toward regulatory clarity for crypto. The institutional DeFi world is at an incredibly exciting moment in its adoption cycle.

Prices of cryptocurrencies such as bitcoin (BTC-USD) and ethereum (ETH-USD) remain at depressed levels from a year ago, but that’s not preventing institutional investors from increasing, or planning to increase, their positions. Other technologies which saw interest from institutional investors were AI integration, as well as blockchain and distributed ledger technology. Both of these saw 14% and 12% of the respondents saying that they were invested in them. But interestingly, the number of investors who were not interested in trading cryptocurrencies was quite high, despite the obvious interest in blockchain technology. Despite the bearish market sentiments, 62% of cryptocurrency investors increased their allocations in the last year, according to a Coinbase-sponsored institutional investor study. Mastercard recently launched Crypto Source™ in October, enabling financial institutions to bring secure crypto trading capabilities and services to their customers.

• If you are a long-term investor who values security above all else, cold storage is the way to go.
• Or DeFi since 2018 that included the participation of institutional investors, private equity and venture capital.
• “I think that kind of clarity would be extremely helpful because the U.S. is increasingly falling behind,” Mr. Malekan said.
• This interest is primarily driven by the motivation to use cryptocurrency as an investment instrument.

In funding ConsenSys, traditional institutions are helping build DeFi infrastructure while also gaining visibility into Web3 applications being developed on the Ethereum blockchain. And some critics have raised questions about whether the asset class can continue to serve as “digital gold” that protects investors during times of crises. The new study provides additional evidence that debunks the diversification benefit of crypto assets. It reveals the sentiments of institutional investors worldwide regarding the future of trading technology, crypto and AI. Bridges the gap between traditional financial and digital assets, offering a seamless integration of the two.

While that might slow down some innovation, the move could help more conventional investors participate by providing more confidence in everything from the reserves backing stablecoins to the financial condition of a token project. Another characteristic of crypto assets is that they operate on decentralized networks, such as the blockchain, which adds security and transparency. The decentralized network ensures that all transactions are recorded and verified by multiple parties in a fast and efficient way. Finally, the asset manager will implement risk management strategies to ensure the portfolio is protected against potential losses.

Regulation is also anticipated to play a crucial role in the industry’s future,accordingto the Official Monetary and Financial Institutions Forum, an independent think tank for economic and investment policy. After FTX filed for bankruptcy on November 11, BlockFi, a crypto exchange, froze customer withdrawals following the collapse of FTX and filed for bankruptcy on November 28. However, by far the biggest casualty was FTX and FTX.US, which operated some of the largest crypto exchanges in the world. While politicians and venture capitalists were on the fence about other projects, Sam Bankman-Fried had become a high-profile crypto celebrity loved by venture capitalists and even a major political donor. In addition to these tools and techniques, investors can also use quantitative models to make more informed investment decisions.

Overall investor sentiment across the digital asset market has certainly been hurt by the recent meltdown of crypto exchange FTX, as well as previous high-profile downfalls and blockchain-based hacks. On top of that, the space has been dealing with global monetary tightening and economic uncertainty. When asked about their outlook on crypto prices, 83% of investors said they see prices trading range-bound or trend lower in the next year. This poll includes 140 US-based institutional investors who manage about $2.6 trillion in assets. At this time, many are reportedly taking advantage of the opportunity to make long-term investments. Custodial services are an integral part of the cryptocurrency ecosystem, particularly for institutional investors.

Investment giant State Street, for example, said in September that it sees unwaning demand for crypto assets from institutional investors. Nasdaq recently established a crypto unit called “Nasdaq Digital Assets,” citing increased demand among institutional investors. As with all emerging technology, familiarity will pave the way to increased adoption. Businesses will enter the world of DeFi by trading Bitcoin futures, buying digital assets, and holding these assets on the balance sheet. As they familiarize themselves with the latter, and once proper infrastructure has been deployed to meet institutional requirements for security, operations, and compliance—we expect institutional investors to delve deeper into experimentation with DeFi.

Voyager https://www.beaxy.com/, a crypto broker, failed to receive a $350 million loan payment from 3AC and filed for bankruptcy in July. Mid-2022 Asset Class Outlook We offer perspectives on growth and value equities and explore ideas for shoring up your fixed income flank amid the evolving economic and market environment. Mr. de Martino reflected a similar sentiment, specifying that “bitcoin is not an asset that’s supposed to be leveraged, and I think a lot of people missed that.”

This security makes them an appealing option for online transactions, as they offer a level of protection that traditional financial systems do not. Here, we discuss the importance of regulation, the concept of regulatory arbitrage, and why the US is the critical regulator to watch. The Central Bank of Brazil has confirmed that the institution will run a pilot test regarding the implementation of its proposed central bank digital currency , the digital real. Crypto investors generally become more sophisticated over time and learn how to use their assets with the ecosystem. Coinbase went public on the NASDAQ via a direct listing in April, and its stock provides a way to bet on one of the largest brokerage exchanges in the space.