In October 2021, we wrote about Wall Street’s growing appetite for cryptocurrencies and explained what the ongoing institutionalization of Bitcoin meant to investors. At the time, the crypto bull run was in full force. BTC and ETH hit their all-time highs the next month, and most people were expecting prices to keep climbing. However, a bear market was lying in wait, and you could have easily thought institutional crypto adoption would wane with the plunging prices. But that didn’t happen.
Read on to learn about the current state of institutional crypto adoption and the reasons behind the persistent Wall Street hankering for digital assets.
Institutional Adoption is on the Rise Despite the Bear Market
In the face of the ongoing bear market, institutions are still enthusiastic about digital assets.
Several Wall Street firms like BlackRock, Fidelity Investments, Charles Schwab, and Goldman Sachs have moved into crypto in various ways. That’s because bear markets are an opportunity for them to innovate without the added pressure of a sudden jump in client demand.
According to data from Chainalysis, institutions have played a role in the growth of global crypto adoption, which remains “well above its pre-bull market 2019 levels.”
In January, FTX CEO Sam Bankman-Fried predicted that 2022 would see a lot of institutions get involved in the crypto market. “I’ve talked to every large bank, every large investment bank, and pension funds — they’re all eyeing the sector,” he stated. His forecast has come true, as we’ll see later in this article.
Why Are Institutions Going Crypto?
Let’s take a look at why institutions are increasingly adopting crypto assets.
Hunting for Higher Yields
The crypto asset markets provide a chance for Wall Street firms to make money by enabling their clients to trade digital assets and other crypto-related products. They are also taking on the crypto custody market as institutional investors build their crypto asset holdings.
For instance, Fidelity Investments’ digital assets subsidiary offers crypto custody services. Nasdaq is also planning to deliver digital asset custody services to institutional clients. This market segment could potentially be financially rewarding for established traditional market participants since it’s an essential component of the crypto ecosystem.
Institutional investors may prefer investing in crypto through legacy firms with long-standing reputations in the traditional financial sector than less-established crypto companies. Therefore, institutions may capitalize on this trust as they help their clients navigate the complex world of digital assets.
Responding to Client Demand
Wall Street firms are going into crypto to meet demand from clients that want to add digital assets to their crypto portfolios. For instance, Schwab introduced its crypto thematic ETF for this exact reason.
The strong client demand for Bitcoin and other crypto assets has somewhat softened Wall Street’s earlier resistance to crypto.
Positioning Themselves for the Future
The crypto space is still in its early days, and scooping a percentage of the market now could position institutions for great rewards in the future. While it’s difficult to tell what will happen years from now, a segment of institutional investors and wealth managers forecast that the crypto bear market will end in six months. This information is based on a survey by crypto asset management firm Nickel Digital.
If this happens, the current market cap of slightly over $900 billion could rise to the trillions. This could indicate that betting on this market now could benefit institutions sooner rather than later.
“Investors acknowledge that the ongoing crypto winter still has some way to run. […] if history is any guide, once the winter ends, these high-beta markets will stage a strong recovery,” Nickel Digital’s CEO Anatoly Crachilov was cited in the survey report.
How Are Institutions Going Crypto?
Financial institutions are forraying into the crypto markets through various avenues, from crypto derivatives and digital asset custody to exchange-traded funds and more.
Here are examples of Wall Street firms that have moved into crypto during the 2022 bear market or are planning to make the move soon.
- In August, Schwab released the Schwab Crypto Thematic ETF (STCE) to meet investor demand. Earlier this year, Charles Schwab also filed the Schwab Crypto Economy ETF with the SEC. The fund tracks companies that benefit from the use or development of cryptocurrencies.
- Fidelity Investments has been making serious moves in crypto for several years now. In September, the firm announced it was considering allowing individual investors to buy BTC on its brokerage platform. Before this announcement, the firm was already enabling its corporate clients to put a segment of their retirement savings into Bitcoin. Moreover, Fidelity has also rolled out crypto ETFs.
- BlackRock, the largest asset manager in the world, launched its first crypto ETF in April. The iShares Blockchain and Tech ETF exposes investors to crypto and blockchain companies. The firm made a similar ETF — iShares Blockchain Technology UCITS ETF — available to its European clients. But the money manager hasn’t stopped at ETFs. It released a spot Bitcoin Private Trust in April for US institutional investors.
- Goldman Sachs has jumped on Bitcoin options, joining other Wall Street players concentrating on crypto derivatives. The bank executed an OTC Bitcoin non-deliverable options trade in March with Galaxy Digital. According to a report by CNBC, Goldman was the first US bank to make such a trade. Moreover, the bank accepted Bitcoin as collateral for a cash loan in April.
- BNY Mellon is planning to build a crypto custody service in 2022. The service will allow clients to store BTC and ETH in BNY Mellon crypto wallets.
Institutional Crypto Adoption Hurdles to Overcome
Before institutional crypto adoption can hit full throttle, though, institutions have to overcome several hurdles first. These include:
- Technical expertise: Institutions need to hire crypto experts and train existing staff to assist them in their crypto adoption journey. The digital asset market is complex and constantly changing, creating a need for the best and most talented experts in the space. Although Wall Street is already amassing crypto talent, the demand is higher than the supply.
- Regulatory concerns: Some institutions view the crypto market as a compliance risk since regulations for this new space aren’t clearly established. The fact that regulators are generally behind the innovation curve could slow down institutional crypto adoption across the globe.
- Skepticism: Skepticism is still rife on Wall Street even though major players are adopting crypto. Skeptics are typically against the principles of crypto and fail to understand how anonymity and decentralization are good things. Even if such cynicism may slow down institutional crypto adoption, it might not necessarily stop it.
To illustrate, JPMorgan’s CEO Jamie Dimon doesn’t personally support crypto. He called Bitcoin a fraud in 2017 and recently said cryptocurrencies are inferior to traditional assets. However, this hasn’t stopped the bank from embracing digital assets. In 2021, JPMorgan gave its wealth management clients access to Bitcoin funds.
Crypto ETPs: The Easy On-Ramp to Crypto for Institutional Investors
Arguably one of the easiest ways for institutions to venture into the crypto asset markets is through exchange-trade crypto products.
Institutional investors looking to add crypto exposure to their funds can purchase crypto ETPs, such as the Iconic Funds Physical Bitcoin ETP or the Iconic Physical Ethereum ETP on regulated securities exchanges in Germany.
Each Iconic ETP is 100% physically backed and trades on one or more of Europe’s leading securities exchanges. Moreover, Iconic uses Coinbase Germany as its digital asset custodian and insures all crypto assets held in custody with a third party.
About Iconic Funds
Iconic Funds is the bridge to crypto asset investing through trusted investment vehicles. We provide investors both passive and alpha-seeking strategies to crypto, as well as venture capital opportunities.
We deliver excellence through familiar, regulated vehicles offering investors the quality assurances they deserve from a world-class asset manager as we champion our mission of driving crypto asset adoption.
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