Trends in Institutional Digital Asset Trading and Investing

May 3, 2021

With global cryptocurrency market capitalization comfortably over $2 trillion USD, the question for institutional investors and traders is not whether they should enter crypto markets but how to do so in a manner that protects their investments, hedges against risk, and meets regulatory requirements.

The crypto and digital asset class has simply become too big to ignore, even for traditional investors such as family offices, high net worth individuals, and corporations. Tesla’s decision to buy $1.5 billion of bitcoin coupled with MicroStrategy’s acquisition of over 90,000 bitcoins has played a major role in proving to the industry that crypto represents an investable asset class.

Itiviti and Diginex hosted a webinar on March 31 to get a pulse of the institutional digital asset trading market and help identify the key challenges and opportunities in this space. Hosted by Spencer Mindlin, Senior Analyst at the Aite Group, the webinar featured Rob MacKay, CEO of Itiviti, Richard Byworth, CEO of Diginex, Dick Lo, CEO & Co-founder of TDX Strategies, and Joseph Edwards, Head of Research at Enigma Securities.

Here are the key takeaways that the participants predicted would be an important part of institutional digital asset trading moving forward.

Corporate interest in digital assets has never been higher

The speakers were united in their view that it’s no longer a question of if, but when institutional participation in crypto assets is likely to occur.

Institutional investing in cryptocurrencies was in its nascent stages a few years ago, with only a handful of organizations willing to get their feet wet. However, exchanges like Diginex’s EQUOS have done lots of work in helping plug the issues of investment infrastructure. The ecosystem around cryptocurrency KYC & AML procedures, governance requirements, and regulatory compliance has matured significantly and moves into Bitcoin from corporations like Tesla have propagated the view that crypto is an investable asset class.

There is also overwhelming corporate interest on the custody side, and we’re likely to see more moves on this front in the near future. The only slight roadblock is the reputational risk around a security breach, but technology advancements will solve that.

Interest in digital assets has also spiked in recent months because of the sharp increase in money supply worldwide as governments prepare stimulus packages to offset losses caused by the virus.

Digital assets offer a store of value, a hedge against inflation, and a diversification of asset portfolios. For institutional investors, the past few years have changed dramatically. A couple of years ago and it was practically impossible to get past risk and compliance concerns, such as the possibility of Bitcoin going to zero. Now, however, the world’s leading cryptocurrency is battle-tested, and confidence in it has dramatically improved.

The crypto derivatives market has matured significantly

The webinar participants pointed to trading assets without custody requirements as a key adoption factor in the futures market.

The CME is often the first stop for investors looking to trade Bitcoin futures, but fund managers soon realize that crypto markets operate 24/7, dissimilar to traditional exchanges. That means they’re taking on an excessive amount of risk, this is where companies like Diginex help plug the gap.

The trading volume in the crypto derivatives market continues to rise, too. There’s been a massive spike in the past six months, with derivatives trading going from $15 billion to $50 billion USD.

Richard Byworth stated that the next big thing in the crypto derivatives market is the listing of options more broadly to allow for structured strikes and structured terms. He projected an uptick in activity around structured products, much like traditional derivatives in investment banks.

A mature derivatives market also means less volatility in digital asset markets since investors trade on the volatility itself, driving it down.

Regulation is still in its early stages but developing quickly

A pressing question for many institutional investors is whether a regulatory framework for digital assets and cryptocurrencies is in the works, as this will help them manage risk and maintain compliance.

The EU’s multilateral trading facility (MTF) is an example of a decent framework for digital securities and derivatives. Still, it needs to be done from a global standpoint to develop unified standards for regulating digital assets.

The Financial Action Task Force (FATF) — a global body dedicated to countering money laundering — is trying to put together a framework for AML and KYC procedures that will help grow the industry.

The important takeaway is that regulation around digital asset trading is moving forward, and governments are taking open, progressive views to this emerging asset class. The underlying issue is that of fragmentation, as regulatory standards are still heavily siloed. But the participants believe that as the U.S. takes the lead in regulation, there’s a significant chance of financial markets around the world following suit.

The sentiments of the speakers can be broadly summarized in this statement: While digital asset trading and crypto trading are starting to become more normalized alongside other asset classes, there is still work to be done around key issues like governance, regulation, custody, technology, and transparency before it is institutionalized to the same extent as traditional assets.

Interested in watching the webinar to get a first-hand look at institutional digital asset trading? Check it out here.

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