Balancing Risk and Opportunity: Institutions Can’t Afford to Ignore Crypto Any Longer

When institutions larger than the cryptocurrency ecosystem begin to wake up to the potential of crypto, it’s certainly food for thought. Can the ever-evolving world of crypto remain outside of mainstream adoption for much longer?

Larry Fink, CEO of BlackRock, the largest asset management firm in the world with around $9.4 trillion in AUM, doesn’t appear to pull any punches when it comes to speaking his mind.

In 2017, Fink dismissed crypto as an “index of money laundering.” But just three years later, the BlackRock CEO admitted that assets like Bitcoin had caught his attention.

“I do believe the role of crypto is it’s digitizing gold in many ways,” Fink said in a recent interview with Fox Business, while also referring to BTC as an “international asset.”

Today, BlackRock is gearing up to launch one of the first Bitcoin ETFs, subject to SEC approval, in what promises to be a flagship moment for the cryptocurrency landscape.

The arrival of an exchange-traded fund from the world’s largest asset management firm is about far more than providing more exposure to crypto on Wall Street; it’s an exceptional form of institutional advocacy.

Data already shows that institutions are waking up to this latest shot in the arm for crypto acceptance. According to the PwC report, Rebuilding confidence in crypto, some 46% of surveyed hedge funds confirmed that they intended to deploy more capital into this asset class by the end of 2023, while 37% claimed that they’re waiting for further market maturity before investing.

Despite a clear swelling of institutional curiosity surrounding cryptocurrencies, risk still remains prevalent for many key players. The path to the aforementioned maturity could be strewn out by repetitive industry shortcomings such as the collapse of major exchange FTX and long-standing issues with liquidity.

Is it possible for institutions to balance risk with opportunity? With a long-anticipated Bitcoin halving event set for Q2 2024 and the expectation of a fresh bull run on the horizon, crypto may become a prospect that’s too tantalizing to ignore.

Sustaining an Institutionally-Focused Ecosystem

One of the biggest risks facing institutions seeking to embrace crypto is that they’re entering a world where many participants champion decentralization and consciously reject traditional financial processes for more decentralized financial services.

Because decentralization makes it more difficult to regulate the industry through single centralized bodies, some institutional investors may be put off by a perceived lack of security. However, other market commentators believe that the arrival of institutions will help to create an adaptable ecosystem that can suit all players.

“I think we’ll get two versions,” explains Clara Medalie, director of research at crypto market analysts, Kaiko. “I think we’ll still see a continuation of the more DeFi side, which is completely trustless. But we’re also going to see a permissioned version of decentralised finance that will be incorporated by these more institutional actors and this has to do with tokenisation.”

“You can’t really have the fully automated DeFi side when you’re talking about traditional finance because there is the risk component, there’s compliance, there’s regulation, and so I think it will be a combination of both depending on what the actual use cases are.”

Institutional access to these newly hybrid crypto markets will be accelerated by the arrival of Bitcoin ETFs, which will allow institutional investors and traders the opportunity to utilize a regulated and familiar investment vehicle for institutions to access through more traditional brokerage accounts.

This would prevent institutions from having to fully immerse themselves into decentralized exchanges to buy and store their assets directly. By simplifying access to crypto through ETFs, we will invariably see a broader range of institutional arrivals in the cryptocurrency market who would otherwise be cautious or wary of existing infrastructure across the market.

We’re also seeing more innovation directly within the world of crypto, generating more opportunities for more sustainable participation for institutional investors. For example, Skarb’s unified trading terminal is institutionally focused and designed to aid traders in overcoming industry barriers.

This unified trading structure allows institutions to access more than 20 liquidity venues and over 6,000 trading instruments, all within one platform, to facilitate deeper liquidity pools with ease.

Skarb’s platform supports spot, options, and futures trading, which allows traders to access multiple liquidity venues across each to hedge their risk or trade multiple legs across instruments and venues. Skarb also simplifies portfolio monitoring and management, allowing investors to see their entire exposure in one place.

Crucially, the Skarb engine allows institutions to manage counterparty risk more effectively by choosing market makers across scores of integrated exchanges for simpler trade execution. The scalable back-end architecture also helps to deliver an efficient performance even with increased levels of volatility throughout the market.

It’s these technological innovations from within the crypto ecosystem that can help to deliver comprehensive solutions for institutions on a level that directly addresses their concerns and suits their trading goals.

Bitcoin’s Halving Event and The Next Bull Run

Bitcoin’s pre-programmed halving events have been a catalyst for bull runs ever since its creation.

The term ‘halving event’ refers to an approximate four-year cycle that sees the mining rewards for Bitcoin distributed to its miners halved, which automatically contributes to ramping up the asset’s scarcity.

With Bitcoin’s 2016 and 2020 halving events culminating in a new all-time high value for the asset in the following year respectively, much has been made for the prospective resumption of the trend in 2024.

Although the cryptocurrency landscape offers very little in the way of recurring trends due to mass market volatility, it’s down in no small part to BTC’s halving cycle that Standard Chartered issued a forecast that Bitcoin would attain a value of $120k by the end of 2024.

Using Bitcoin’s stock-to-order flow chart as a guide, we can see a loose correlation between Bitcoin halving events and price rallies that corroborate Standard Chartered’s forecast.

The resumption of this trend would not only be lucrative for institutional participants within the crypto space, but it would also provide a significant boost to the market capitalization of the cryptocurrency market.

At a total market cap of around $1.4 trillion today, the cryptocurrency market is around one hundredth the scale of the total global stock market capitalization. While this presents a significant liquidity issue for many of the world’s largest institutions, we’ve seen recent halving events generate exponential growth within the ecosystem that could surpass previous peaks of $3 trillion within the cryptocurrency market in the next bull run.

The prospect of a Bitcoin bull run is far from assured, of course. Bitcoin’s new all-time high value of $69,044.77 in November 2021 may have correlated with the asset’s halving cycle, but it also took place during a tech stock boom amidst significant post-Covid governmental stimulus packages that generated more liquidity for retail investors.

Ekta Mourya, editor at FX Street, suggests that a weakening trend for Bitcoin halving cycles in recent years could be a danger for investors. “The likelihood of a BTC halving acting as a bullish catalyst for BTC price is dwindling. This was observed in the case of Litecoin as well, an asset created by forking the Bitcoin blockchain,” Mourya warns.

Institutions Hold the Key to Their Future

At present, the prevailing cycle surrounding the institutional adoption of crypto is that it’s the institutional pioneers that can drive meaningful change in the industry.

"Are we ready for institutions? Just looking at everything that happened, probably the answer is no," said Chen Arad, co-founder and chief experience officer at crypto risk surveillance firm Solidus Labs. "But the map comes with the territory."

It will only be through institutional adoption and advocacy that the crypto space will become a productive environment for more institutions.

Although there’s still risk throughout the industry, we’re seeing evidence that the crypto ecosystem is becoming safer and more sustainable for all participants.

In the launch of Bitcoin ETFs providing institutions with unprecedented exposure to crypto markets in a regulated environment, we may see a surge in advocacy that converts institutional interest into intent.

Also published here.