For many of the participants in the crypto markets, the involvement of institutional investors is fundamental for the growth of the industry. Indeed, people are so obsessed with these investors that they often overlook the adverse effects they could bring with them. Recently, Jack Palmer, one of the brains behind the development of Dogecoin, stated that institutional investors are likely to curtail the objectives of the crypto space.
Jack Palmer believes that the obsession amongst crypto community members for the involvement of traditional financial service providers is unhealthy. In a post published on the Diar, a cryptocurrency online newsletter, Jack opined that these institutions are likely to divert the course of the cryptocurrency sector.
The argument fronted by Palmer is based upon the three major advantages of digital currencies. He believes that institutional investors will inhibit the realization of these benefits, which include:
One of the main reasons for the creation of Bitcoin was to eliminate dependence on a single point of failure. Bitcoin addresses this challenge through decentralization –where if one node fails, the others on the network replace its functions without a noticeable glitch in operations. Moreover, its Proof-of-work consensus mechanism ensures that no single entity has censorship rights over other nodes on the network.
The inclusion of banks as the gateway to cryptocurrency trading reestablishes the single point of failure that Bitcoin seeks to eliminate. For instance, if an exchange platform or a bank goes offline, a user cannot access the Bitcoin network. Also, the exchanges and banks can easily censor a user’s account if they deem it suspicious.
A ‘trustless' currency is one that does not place trust on a central authority. Such is the case with Bitcoin, as every user has their own private keys which gives them full control over their money.
Currently, a significant number of trading platforms are offering custodial solutions to their customers. This goes against the principles of trustless financial transactions, one of the fundamental ideologies of virtual currencies. Essentially, storing Bitcoin gives the exchange platforms control over the customers’ funds.
Additionally, Jack mentioned that large amounts of cryptocurrency held by a central authority are vulnerable to hacking attacks. In this regard, he referred to the Mt. Gox incident where millions worth of digital currencies were stolen by hackers.
Bitcoin rose to prominence after it emerged that the infamous 2008 financial crisis was caused by malpractice. Unlike fiat money, Bitcoin was immune to manipulation by central banks, as all members to the network had access to a public blockchain ledger. This ledger enables Bitcoin users to track the entire history of their transactions. Its immutability means that the records are reliable.
However, the influx of institutional investors has resulted in the creation of private off-chain databases. The excuse for this practice is that off-chain databases are scalable, faster and cheaper. On the contrary, transactions can no longer be verified using cryptographic algorithms and are therefore vulnerable to skewing.
Impact Of Institutional Investors On The Crypto Market
As mentioned above, the involvement of institutional investors contradicts the key objectives of cryptocurrencies. As time goes by, these institutions are likely to establish their own cryptocurrency tokens over which they have total control. In fact, the warm reception afforded by the crypto community will even spur banks and exchanges to issue and manage their own cryptocurrencies. A perfect example for this is the introduction of centralized stablecoins such as the USDC.
The only hope for digital currencies are the improvements on their underlying blockchain protocols. These standards are resistant to the dominance that institutional investors may impose over virtual currencies. For instance, scaling solutions such as Lightning and Plasma do not require custody over users’ digital assets. Likewise, there are several privacy-focused cryptocurrencies such as Grin and Zcash.
Nevertheless, the decision lies with the crypto community. Will they compromise the core ideologies of cryptocurrencies in favor of market growth and immense capital offered by institutional investors? For now, let’s wait and see.