- There are several points of differentiation between retail investing and institutional investing, including risk, size of investment, and strategies
- Cryptex’s TCAP is an Ethereum smart contract that relies on trusted crypto data oracles for real-time price information
The cryptocurrency industry has been a retail phenomenon so far. Institutions are undoubtedly moving, but full adoption is still in progress. Once it is clear that the industry is at a tipping point, we will likely see the institutional floodgates fully open.
In 2017, professional investors such as niche crypto funds cracked the institutional valve by following retail investors into the sector. The industry is still awaiting the entry of pension funds, mutual funds, hedge funds, investment banks, sovereign wealth funds and insurance companies. When you consider that institutions account for over 85% of US stock trading volume, these open floodgates will take cryptocurrency market capitalization to the next level.
How Today’s Institutional Investing Differs From Its Retail Equivalent
There are several points of differentiation between retail investing and institutional investing.
The size of the investment is the main and obvious differentiator. Institutional investment managers allocate sums that have a real impact on crypto spot prices and liquidity. Comparatively, institutions are in an entirely different class, with billions under management.
Trading and investment strategies
While the average retail investor uses simple trading strategies, the institutional equivalent uses advanced analysis-driven trading and investing strategies. They have access to higher quality financial data, use automated trading tools, and can tap into the best trading research to make more informed trading and investing decisions.
Institutions pay much more attention to risk and are much more cautious in their approach compared to retail. It’s probably because they’re managing someone else’s money rather than their own.
Both retail and institutional investors take on a certain level of risk, but on average the appetite for institutional risk is much lower.
Asset Custody, Governance and Compliance
Institutions have rigid corporate rules to follow that retail investors don’t have to consider. They are subject to much greater scrutiny to meet governance and compliance rules, with oversight being enforced by various state agencies.
When it comes to custody and ownership of digital assets, things will likely be simpler for the individual investor, who directly owns the asset. Institutional investors may not own the asset – ultimately their clients are the owners of the assets.
Factors holding back institutional investment
All the points of differentiation explain why there has been very little institutional investment in crypto so far. Institutions have a specific set of fundamental requirements that must be met before they consider entering the nascent crypto market.
Institutions need to know that there is enough liquidity in the markets they participate in to execute short-term trades. The scale of their typical investment allocations has simply been too large relative to the overall market capitalization of the crypto industry. Bitcoin reached a market capitalization of $1 trillion in 2021. Still, this is just a drop in the ocean when you consider that the global stock market capitalization stands at $125 trillion. dollars, with the bond market on a similar scale.
In terms of trading strategies and risk, there have been concerns about market manipulation and other questionable practices in crypto, such as wash trading, which would have implications for institutional involvement.
Institutions have been reluctant to get involved in crypto due to a lack of regulatory clarity. To meet Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations and stay compliant with the rules designed for TradFi, institutions need to know who is on the other side of the trade. The pseudonymous nature of most blockchains makes this problematic.
Despite these challenges, the institutional investment landscape for digital assets is rapidly changing. All of the factors that inhibit institutional involvement are resolved as the space grows and matures. Regulation is also catching up, and the ecosystem needed to support institutional-grade investments is forming.
The advent of indexing in crypto
In traditional markets, index funds are an easy way for individuals to invest passively with lower fees. While institutions are actively managing funds, there is a case where exposure to an index-like vehicle in the crypto space would benefit them at this stage.
Although institutions tend to have a more conservative appetite for risk, they increasingly want exposure to a high-yield crypto market. With high risk in individual crypto projects, given their nascent stage of development, a product that tracks the entire crypto market will appeal to them.
Cryptex Finance has launched a Total Crypto Market Cap (TCAP) token to capitalize on this market need. TCAP is an Ethereum smart contract that relies on trusted crypto data oracles to obtain real-time price information. TCAP is a crypto-derivative asset that closely tracks prices against thousands of crypto-assets. Through it, individual and institutional investors can gain price exposure to the entire crypto market in real time.
Although the United States does not have any form of crypto exchange-traded fund to date, investment trusts such as Grayscale and index funds offered by Bitwise are available in conventional markets. However, they are limited to major cryptocurrencies.
Institutional-Grade DeFi Products
Innovators in the crypto space have identified the issues that institutions are facing and are building solutions to overcome them, particularly around compliance. The following section reviews examples of such products already on the market.
Aave is one of the original DeFi money market protocols. Aave Arc was developed specifically for institutions, as it is an authorized version of the Aave liquidity protocol. Due to compliance and regulatory issues, regulated institutions cannot access the open-source Aave protocol. With Aave Arc, all participants are AML compliant and KYC verified. With authorized liquidity pools isolated from regular Aave pools, institutions can now access DeFi without violating compliance rules.
For the Compound Liquidity Protocol, Compound Treasury was launched. Separate from the originating protocol, institutions can provide dollars to it through traditional banking, and the compound treasury, in turn, donates those funds to the compound protocol. This degree of separation provides a trusted intermediary for institutions, allowing them to remain compliant with KYC and AML standards and other regulatory requirements.
Other market players also pivoted to respond to the expected influx of institutional capital. Cryptex Tower is a product about to be launched by Cryptex Finance, which will add new hard mode vaults with a reduced collateral ratio to attract institutions alongside the regular mode vaults of their existing DeFi product. . Gemini backs the offering with institutional-grade asset safekeeping.
Additional Institution-Centric Services in DeFi
Similar to KYC and AML compliant DeFi liquidity pool placement, many other services have sprung up to meet demand and institutional requirements.
Qualified digital asset custodians have entered the space including BitGo, Gemini, Coinbase Custody, Copper, and Anchorage. Their offerings have been developed specifically for institutions, including assured cold storage and peer-reviewed multi-signature security.
Crypto-banks such as Seba and Signum have emerged to offer solutions for institutions looking to dive into the digital asset business.
Institutions that have dipped their toes into crypto already tend to use over-the-counter markets rather than the centralized exchanges that individual investors use. Many vendors have entered the space including but not limited to GSR, Galaxy Digital, Genesis Block, FTX OTC, and Jump Trading.
Transaction Transition Services
Web3 wallet provider Metamask has stepped up its efforts to meet the needs of institutional businesses by launching Metamask Institutional. The institution-compliant wallet offers the same functionality as its original wallet but with some differentiation to facilitate optimized trade flows.
Information on various authorized liquidity pools beyond those covered in this guide
- Maple Finance – The Maple protocol provided institutional borrowing and fixed income lending through loan pools managed by pool delegates.
- Alkemi Network – A licensed liquidity pool facilitating programmatic borrowing and lending through a trusted, institutional-grade liquidity network.
- Centrifuge – Through a partnership with Aave, Centrifuge enables the tokenization of real-world assets, accessible through authorized pools. Businesses can tokenize trade receivables and invoices and use these real-world assets as collateral to borrow money.
- Credit – An institutional private credit market incorporating a compliant regulatory framework.
- AllianceBlock – Bridging TradFi with DeFi by allowing users to prove their identity in a trustless way and providing a globally compliant capital market.
This investor guide was sponsored by Cryptex Finance.
Educate yourself. Check out the Investor’s Guide to AVAX, Investor’s Guide to Music NFTs, Investor’s Guide to DeFi 2.0, and Investor’s Guide to Avalanche.
The content of this webpage is not investment advice and does not constitute an offer or solicitation of an offer or recommendation of any company, product or idea. It is intended for general educational purposes only and does not take into account your individual needs, investment objectives or particular financial situation.
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