The crypto industry is experiencing its longest bear market in history, but the potential for institutional adoption represents a light at the end of the tunnel. While some regulatory hurdles remain, institutional adoption will make the industry more appealing to mainstream investors, laying the groundwork for the next bull run. At the same time, some worry that this marks the beginning of a takeover by traditional finance, with institutions posing a threat to crypto-native firms. Instead of an industry takeover, however, institutions’ crypto debut will present an opportunity for collaboration.
Crypto’s core values
Crypto was created to address a lack of trust with regard to major financial institutions in addition to global financial inequality. The 2008 recession, which just barely preceded the crypto industry’s birth, only further emphasized the need for this new form of currency. In contrast to the exclusive institutions of traditional finance, cryptocurrency firms have aimed to provide an accessible, decentralized, peer-to-peer method of transaction.
However, the traditional financial world was largely opposed to this new financial system, driving a wedge between the two. Now, the same TradFi leaders who once called Bitcoin “an index of money laundering” are singing its praise, prompting fears within the crypto space that TradFi will infiltrate, rather than support, the industry and its goals.
While recent crypto initiatives from major institutions such as the Bitcoin ETF filings made by BlackRock and Fidelity are contributing to mounting concerns, the reality is that backing by players such as these will help propel crypto into the traditional finance world. In effect, their support will provide the necessary resources and reputational support to sustain the crypto industry through difficult macroeconomic conditions, namely, rising interest rates and a looming recession.
Behind the growth of institutional support
The crypto industry continues to mature, revealing to its critics in the TradFi world that it’s not all memecoins and unicorns. On the contrary, crypto has become a diverse and sophisticated industry that is able to provide institutional-grade services to its customers.
The underlying blockchain technology offers a number of use cases to improve existing trade systems, such as tokenization, which can be used to streamline inefficient settlement processes, and immutable storage, which allows for more transparent and efficient data management. A recent EY study found that over half (57%) of investors surveyed were interested in tokenization.
In the same EY study, 90% of investors stated they would engage with a traditional institution for crypto custody. This speaks to a broader issue of trust in the crypto industry. As the new kids on the block, we have to prove ourselves to users. Recent scandals like the FTX bankruptcy have made this difficult, but partnering with institutions that have fostered good relationships with investors can help regain public trust.
This surge in demand from their customers is in large part what led to the significant shift in interest from institutions we’re seeing today. Whereas in previous years institutional investors would not go near the industry, they now see it as part of a wider strategy to diversify their assets and capitalize on emerging technology; indeed, a recent Laser Digital survey found that 96% of investors view digital assets as an opportunity to diversify their portfolio.
Institutional interest will help ease regulatory pressure
Despite growing TradFi support, the lack of clear regulatory guidelines has been a challenge for the crypto industry, especially in the United States.
While some fear regulation, given recent regulatory battles have rocked the industry and caused uncertainty for users and firms, the truth is that it has the potential to wipe out bad actors, bring about better consumer protection and safeguard the industry from scandals like FTX, which cause more turmoil in the long term.
Institutional players could be the trojan horse crypto needs to sway regulators. Because the latter is used to working with institutions and trusting their expertise, they may be more likely to grant them approval for innovative products like Bitcoin ETFs, which they’ve been hesitant to do so far.
Crypto firms have long sought to introduce Bitcoin ETFs in the U.S., with the Winklevoss twins — the founders of Gemini — applying for a Bitcoin fund as early as 2013, but have faced numerous hurdles in getting regulatory approval for a fund. The hope is that institutional backing will give regulators more faith in the value of this product, opening the doors for crypto-native firms to establish their place in the ETF market, which they have previously struggled to do.
TradFi interest and crypto’s public perception
Furthermore, interest from large-scale institutions appears to create a ripple effect, wherein more firms enter the industry as they see major players getting into crypto.
For example, the announcement from BlackRock that it would file for a Bitcoin ETF was followed by a partnership between Fidelity, Charles Schwab and Citadel will launch EDX Markets, a new crypto exchange geared towards institutional investors, and will file for their own Bitcoin exchange-traded fund. Together these announcements caused Bitcoin to rally to reach new highs for 2023, indicating a positive response from investors.
Crypto’s new era
The entry of large-scale institutions into crypto this year marks a new era for the crypto industry, bringing much-needed capital and reputational support to see crypto out of the bear market. Going forward, it is important that crypto-native firms keep core principles in mind, ensuring that TradFi backing does not undermine the democratic structure of crypto projects. With these core values in mind, long-lasting partnerships can endure.
