Imagining How And Why Cryptocurrencies Will Become Institutional Assets For Investors
Cryptocurrencies Could Become Institutional Assets, Experts Speculate
The cryptocurrency community is split on the issue of institutional adoption. On one hand, the initial philosophy and purpose of digital assets like Bitcoin was generally to escape the follies of the traditional financial sector, which its creators thought that filled to the brim with dangerous corruption and manipulation problems. But on the other end of the spectrum, most experts agree that cryptocurrency adoption by major institutional powers could be the key to mass adoption—a requirement to fulfil cryptocurrency’s promise to change the world of economics.
But there stand several obstacles in crypto’s way before it can be considered an institutional asset. An institutional asset simply refers to a financial asset which is facilitated in exchange by major institutions, including agencies like the New York Stock Exchange (NYSE). There has been significant interest by some institutions in developing a framework to endorse and help the trade of crypto, but actual progress seems to have been relatively minimal.
The main requirement for institutional asset status for major cryptocurrencies will be the creation of a regulated, compliant trading exchange at a major firm for crypto. At the time, such a thing does not exist. The interest of parties like the Intercontinental Exchange, the company in charge of the New York Stock Exchange, have expressed deep interest in creating such a framework.
The biggest obstacle for the creation of an institutional asset framework for cryptocurrencies like Bitcoin comes from the deep regulatory questions that cryptos pose. In particular, legal issues concerning the custody of securities and the process by which trades are settled present problematic questions that exchanges vying for cryptocurrency integration have been thus far unable to sufficiently answer.
Moving forward, the prize of an institutionalized asset class for Bitcoin will go to the institution most effective at navigating the complex regulatory waters created surrounding cryptocurrencies currently on the market.
The Retail Infrastructure Problem
Another major issue for institutional embrace of a crypto asset class is the retail-first nature of the industry. In the beginning days, it was solely the retail and average investors that kept currencies like Bitcoin afloat. Having created more millionaires in the past ten years than nearly any other modern financial bubble, the cryptocurrency community has always been filled with speculators who thrive on the liquidity and volatility enjoyed by the confusing markets.
But this spells a problem for the growing class of institutional capital investors who want to jump onto the cryptocurrency train. The very structure of the blockchain and of cryptocurrency predisposes it to volatile prices, fluctuations, and even to crashes. This scares institutional investors, many of whom want a more reliable structure to back their investments.
According to some experts, this could be a nearly insurmountable obstacle. It isn’t that cryptocurrency currently appeals mostly to retail investors. This problem is that the currency is built around these smaller investment bubbles.
The Path To Capital Classification
One way that the cryptocurrency markets might gain the attention and interest of institutional investors would be to find a way to physically deliver some kind of an asset to help to settle trades. Institutional investors would be enticed by the concept of having direct access to the often-volatile commodity which they purchased.
This, of course, is a huge problem for the current structure of nearly every cryptocurrency in existence at the moment. But some exchanges have already toyed with some version of this idea. The Chicago Board Options Exchange, for example, has attempted to work out a method to offer cash in the place of actual, physical Bitcoin to settle their trades. But since there exists little liquidity in many parts of this budding market, experts say that this method of settling institutional Bitcoin trades might be especially susceptible to manipulation—something that again pushes institutional investors away from the markets.
To Centralize Or Not To Centralize?
The core problem facing the cryptocurrency community since its inception, the concept of centralization of cryptocurrency markets is as much a practical as a philosophical one. According to an article by Forbes, cryptocurrency might be able to gain institutional class status in either scenario—though they play out radically differently.
If Bitcoin were to succeed by centralization, it would need to more closely follow the structure of the existing, traditional financial system. This would result in many of the troublesome regulatory and governance problems on the blockchain being removed, which would then allow investors to slowly transition into the Bitcoin market with ease.
This is naturally a troubling proposition for many within the crypto space. The more cryptocurrency attempts to emulate the traditional financial systems, the further the technology seems to have strayed from its original intents and purposes.
But in an alternate possibility, Forbes speculates that cryptocurrencies could exist as a decentralized system, provided that it integrated a set of protocols mean to support the innerworkings of “each independent function.”
According to the author, both of these seemingly conflicting systems can exist together, providing institutional money with the best of both worlds. Cryptocurrency can theoretically keep its largely decentralized nature while still integrating some existing functions of the traditional financial system into its ranks.
The Call to Institutions
Regardless of how the cryptocurrency community develops and changes in order to fit into the current financial market, it is clear that institutional involvement is necessary to help the transition happen smoothly and effectively. The core function of cryptocurrency technology, to avoid the fallible failings of central banks and potentially corrupt governments, could be a major boon to people and businesses all over the world.
But the stark reality behind the philosophy of cryptocurrency is that institutions must first step in and help boost the technology and transitional operations of cryptocurrency before the industry can step into the traditional financial world effectively. As it stands, the pressure is on institutions to capitalize on cryptocurrencies and to make use of some of the most exciting technology to come out of the last couple decades.