- Providers servicing institutional investors need to have credibility in order to attract high capital investors.
- Institutional investors differ in terms of their level of understanding, but all have a unifying trait.
- Investors seek to bypass regulatory and platform lackluster in order to feel more confident about their investment.
- Standardization needs to overcome complexity in order to attract more institutional capital.
Institutional interest in cryptocurrencies has been a hot topic of discussion throughout 2021. Even during the 2017 crypto bull run, institutional investors were levying their opinions, directly impacting market sentiment. Now, Jamie Damion, CEO of J.P. Morgan, “regrets making” groundless Bitcoin remarks.
According to a crypto study conducted between May and June, 82% of institutional investors and wealth managers are seeking to increase their cryptocurrency exposure “between now and 2023.”
The study included respondents from the US, the UK, France, Germany, and the UAE who currently have active cryptocurrency markets. Institutional investors are seemingly testing the waters in the unregulated market and gauging its potential before committing to increasing their positions.
Investing Is Based on Trust
Institutional investors are atypical traders whose demands radically differ from retail investors. During an interview, Henrik Gebbing, CEO of Finoa, emphasized that institutional investors value credibility more than any other factor when considering investing in crypto.
"We want it exactly to tackle this market of institutional investors out of a trusted jurisdiction, with a trusted regulator, as a now regulated institution."
Gebbing pointed out that institutional investors are not one-size-fits-all. There are different types of investors, all of whom have different ideals and levels of understanding. Depending on the level of their blockchain knowledge, their needs are met at a different pace.
"There are the more traditional ones, like family officers who see crypto as a potentially new high-risk asset class, that they're used to diversify their portfolio..... Then there is the much more crypto savvy like crypto funds, crypto hedge funds that are absolute believers, ideologists into decentralization into the overall ecosystem."
Regardless of their level of understanding, or their needs, all institutional investors have a unifying trait. As Gebbing frames it,
"they operated with much larger investment volumes."
Moreover, high-capital investors are seeking a trustworthy, unified solution, which exchanges such as Binance fail to provide. On the other hand, Finoa lends a helping hand to institutions by providing custodian crypto services which offer institutions easier access to the crypto ecosystem.
High capital comes with demands
According to Gebbing, competition in the market is not solely dependent on a leading provider servicing all the needs of investors. Essentially, investors are dependent on three main determinants: geographical, technological, and product differentiations.
In that regard, institutions are trying to mitigate any regulatory blockages which could hinder their profit margins. Gebbing highlighted that investors don’t want to
"fall within one regulatory risk because the regulators changed their mind about crypto."
As such, investors want to diminish investment risks as much as possible and so not handle their assets themselves.
This builds onto the same issue of trust, where custodian service providers are required to sell trust before anything else. Discrepancies in technological knowledge impede investors as it doesn’t allow them to assess their risks appropriately. Gebbing emphasizes there are “a lot of institutional investors who definitely want to work with third-party providers.”
To accomplish these aims, institutional investors need to attain a reasonable level of understanding, or guarantees that their investments are guarded, outside of the previously established risks of market volatility, before increasing their crypto shares.
Drawbacks Are Normal with Fast Paced Innovations
The fast-paced, innovative landscape of cryptocurrencies leaves no additional room to standardize a user experience. As Gebbing observed, the goal of institutional service providers is to enhance product security and bring new protocols to the attention of institutional investors.
"But what we see is that we can still very much improve or like, say, over a functionality to an actual, enjoyable, standardized, unified user experience."
Traditional finance has standardized UX design and has become accustomed to the underlying software. Still, in cryptocurrencies, technical complexities make such processes latent. Gebbing emphasizes that the lack of standardization should not be a deterrent for investors looking to invest.
Familiarity is similar to understanding. The more something looks familiar, the more someone will be confident in their decisions, which helps to lower the risk. Blockchain technology is still not interlinked; only oracle networks somewhat facilitate interconnectivity between ecosystems.
Creating an overarching system for institutional investors is not the central focus of providers servicing institutional entities. Instead, their goal is to increase trust, which in turn will increase the acceptance of crypto assets.
On the Flipside
- Lack of standardization creates entry barriers for new investors.
- Institutional outflows increased over the last week of June, as Bitcoin continues to trade sideways.
- Sharp crypto regulatory changes impede investors from increasing their funding capital as it does not allow them to mitigate their own risks.
- Institutional investors are not fully immersed in cryptocurrencies and are still testing the market’s waters.
Watch the entire interview here: