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Institutional Crypto Investors

Institutions Are Still Warming Up to Crypto During the Downturn

Learn what happened during the crypto winter, why institutional investors are ignoring the crisis, and what’s next for the industry.

The crypto industry has experienced no shortage of setbacks over the past year. But, while some pundits see FTX’s collapse as the nail in the coffin, institutional investors seem unphased by the string of crises. 

Let’s take a look at the crypto winter, why institutional investors are ignoring the crisis, and what’s next for the industry.

Crypto Winter Turns into a Blizzard

The crypto winter began in May 2022 with the collapse of TerraUSD ($UST) and the sister coin backing it, Terra ($LUNA). In addition to erasing $40 billion in value, the collapse had a knock-on effect on other crypto projects relying on the stablecoin. After all, many investors use stablecoins as collateral for crypto loans.

Some high-profile casualties included:

  • Celsius Network, a bank-like crypto service, plummeted more than 80% between March and July.
  • Three Arrows Capital, a crypto hedge fund, imploded and could not repay billions in loans.
  • Voyager Digital, a crypto broker, failed to receive a $350 million loan payment from 3AC and filed for bankruptcy in July.

However, by far the biggest casualty was FTX and FTX.US, which operated some of the largest crypto exchanges in the world. While politicians and venture capitalists were on the fence about other projects, Sam Bankman-Fried (SBF) had become a high-profile crypto celebrity loved by venture capitalists and even a major political donor.

After FTX filed for bankruptcy on November 11, BlockFi, a crypto exchange, froze customer withdrawals following the collapse of FTX and filed for bankruptcy on November 28. 

All of these developments had a massive impact across all crypto assets. The global cryptocurrency market cap fell from nearly $3 trillion to less than $900 billion in less than a year. And even large cryptocurrencies, like Bitcoin and Ethereum, have yet to recover from the losses.

Institutional Investors Remain Active

Retail investors, entrepreneurs, and venture capitalists have taken a step back from the crypto space following the billions of dollars in losses. Not surprisingly, fewer investors seem willing to speculate on the next ICO or NFT after getting burned this year.

However, there’s evidence that institutional investors have struck a different tone. For example, Bitstamp, a crypto exchange, told CoinTelegraph that institutional registrations on its platform were up 57% in November compared to October. And at least three recent surveys found similar sentiments among institutional investors.

Institutional Crypto Investors
Results from a recent Coinbase institutional survey. Source: Coinbase

These surveys included:

  • Coinbase’s 2022 Institutional Investor Digital Assets Outlook Survey found that 62% of institutional investors had increased their allocations to crypto over the past 12 months. In addition, 58% plan to increase the percentage of assets they invest in crypto.
  • Fidelity’s Digital Assets Survey found that 74% of institutional investors plan to buy or invest in digital assets in the future, up 3% from 71% in 2021. Moreover, high-net-worth investors reported a substantial increase in future preference to buy digital assets, increasing from 31% to 74% year over year.
  • CoinTelegraph’s Institutional Survey found that 43% of institutional investors already own digital assets – primarily Bitcoin and Ethereum. In addition, the survey found investors are interested in adding tokenized securities and NFTs to their portfolios.

Coinbase’s institutional survey suggests that many funds have created a separate category for crypto or are classifying crypto as part of an innovation or emerging technology allocation. As a result, these funds have been buying crypto assets to improve the funded status and reach their target asset allocations in these categories.

By comparison, just 34% of Coinbase’s respondents said they were investing in crypto assets as a buy-and-hold opportunity. In fact, 56% thought that investment-grade corporate bonds would offer better returns than digital assets – which tied with real estate at 35%. Of course, crypto hedge funds were an exception, seeing more opportunity for alpha.

Financial Institutions Scale Up

Institutional investors haven’t been the only companies active in the crypto space. Financial giants, like Mastercard and Goldman Sachs, have scaled up their plans to enter the crypto space by integrating new capabilities into existing products or making acquisitions.

Goldman Sachs plans to spend tens of millions of dollars to buy or invest in crypto companies following FTX’s collapse, according to Reuters. The investment bank sees interesting buying opportunities at attractive prices and is actively conducting due diligence on several firms.

Mastercard recently launched Crypto Source™ in October, enabling financial institutions to bring secure crypto trading capabilities and services to their customers. Through partnerships with regulated and licensed custody providers, Mastercard’s partners will have access to a comprehensive suite of buy, hold, and sell services for select crypto assets.

The Bank of New York Mellon and NASDAQ are also working on crypto custody platforms for institutional investors and plan to enter the crypto services market. Meanwhile, Franklin Templeton, Betterment, Société Générale and other wealth management firms have also been developing plans to launch products into the crypto space.

What’s Next for Crypto?

The crypto winter and the events leading up to it will likely spur additional regulatory oversight to protect investors. While that might slow down some innovation, the move could help more conventional investors participate by providing more confidence in everything from the reserves backing stablecoins to the financial condition of a token project.

These regulations could also help clear up many ambiguities and increase investment in the space. After all, 52% of respondents in Coinbase’s survey cited the uncertain regulatory environment as their most pressing concern, which is higher than 48% citing volatility, 36% citing market manipulation, and 10% citing liquidity.

Among other things, these regulations could include much-needed tax guidance. The IRS’ ambiguous tax laws surrounding digital assets have led to numerous lawsuits and attempts by regulators to get answers. Unfortunately, while the agency has provided some guidance, its priorities seem more geared toward enforcement to close the so-called “tax gap.”

The Bottom Line

The crypto winter has led many retail investors and venture capitalists to pull back from the space. However, institutional investors from conventional finance continue to pour money into crypto assets. At the same time, several large financial institutions are working toward acquiring, building, or launching crypto trading and custody products.

Most institutional buyers are buying crypto assets to fill allocations in portfolios for digital assets or emerging technologies. Meanwhile, others are purchasing to generate yield or capitalize on low prices.

Looking ahead, the crypto industry could see more regulation following the events leading to the crypto winter. And surprisingly, these regulations could address many of the biggest concerns of institutional investors. Ultimately, that could lead to more investment long-term.

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The above is for general info purposes only and should not be interpreted as professional advice. Please seek independent legal, financial, tax or other advice specific to your particular situation.

Justin Kuepper