Four Points of Introspection for Institutional Investors

By Daniel Elsawey

The price of bitcoin topped $60,000 for the first time in six months in October, as markets bullishly reacted to news of SEC approval of a futures-based bitcoin ETF. The world’s largest cryptocurrency by market cap later surged to a new all-time high above $65,000, after the first bitcoin-based ETF launched.

Speculation over the price continuing its climb and topping $100,000 appears to be turning into a debate over when, and not if. And while the launch of the first U.S. bitcoin futures-based exchange-traded fund is another major step forward for our industry, the related volatility is nothing new.

Over the past year, the word volatile has certainly seen its fair share of use when it comes to describing the state of digital assets — and rightfully so. We’ve seen reports of market manipulation covered in the national media spotlight, while popular (and not so popular) coins have surged and plummeted seemingly in reaction to a tweet.

While it’s exactly this type of volatility that many traders love; on the flipside, it’s what’s been keeping many institutional and professional traders parked on the sidelines. Reports of crypto exchanges suffering major hacks haven’t bolstered investor confidence, either. In fact, safety and security of assets has been mentioned in multiple surveys of wealth managers and institutional investors as the top concerns keeping them from entering the waters.

Even so, the institutional appetite for this emerging asset class is growing. According to research from Fidelity, seven in ten institutional investors expect to buy or invest in digital assets in the future, and more than 90% of those interested in digital assets expect to have an allocation in their institution’s or clients’ portfolios within the next five years. Considering that American investors reported gains of more than $4 billion in 2020 from crytpocurrencies alone, according to research from Chainalysis, it’s easy to see why. Call it institutional FOMO.

As new exchanges and blockchain-based products are coming to market; it’s critical that institutional investors and professional traders do their homework. Investors should keep the following questions in mind when selecting a digital asset exchange.

Is the platform regulated?
Given the decentralized origins of bitcoin, regulation and cryptocurrencies have long been thought of as polar opposites. That is likely a key reason why many of today’s popular cryptocurrency exchanges choose to locate their headquarters outside of the United States.

Knowing where the exchange is headquartered matters. If the exchange is located within the U.S., it’s subject to some of the most stringent compliance in the world.

How secure are the assets?
The answer to this question largely depends on the type of wallet the assets are stored and custodied in. Types of storage can range from cold to hot wallets. The wallets that are specifically designed for institutional use are typically either using secure multi-party computation (MPC) or hardware secure modules (HSMs).

The most innovative solutions are combining pieces of each. Institutional investors should look for exchanges that work with custodians that deploy the most secure solutions in a regulated environment.

How is the customer service offering?
When institutional investors need attention to a trading matter, timing is everything. Institutional clients are used to a professional level of service that not all digital asset exchanges can meet.

Before choosing a platform, investors should learn about the type of customer support the exchange delivers.

The bottom line
The wild price volatility seen in bitcoin and other leading cryptocurrencies has attracted many fintech entrepreneurs and startups looking to get in on the action. Investors looking to invest across any digital asset exchange should take a look under the hood, which means reviewing the underlying technology of the platform. The digital asset exchanges that are poised to go the distance are those that are innovative and regulated. This uncommon combination in the world of digital asset exchanges is the key to mainstream adoption.

The shift toward digital assets is still in the early innings but it is intensifying at a rapid pace. According to a survey from PwC in partnership with Alternative Investment Management Association and Elwood Asset Management, more than 85% of hedge funds plan to deploy more capital into digital assets by the end of this year. Meanwhile, a report from Moody’s says that demand for digital currencies is already reshaping the entire financial services industry.