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David Drake

April 27, 2018 Article

Are institutional investors willing to put their money where their mouth is?

Institutional investors such as pension funds, mutual funds, endowments, and sovereign wealth funds, are slowly taking interest in cryptocurrencies. These investors have kept their eyes on this new asset class for the past three years. Despite the recent media controversies surrounding ads ban on by tech firms and government crackdowns on cryptos, their interests seem to remain waned.

These and other factors has caused a drop in crypto market performance. Bitcoin took a hard hit at the start of 2018, dropping in value by over 50 percent, but with institutional investors making up approximately 45 percent of the entire global asset class, even small contributions into the market can make an enormous difference for the crypto market.

Leading the Pack

After terming the crypto market ‘
a bubble’ in January, George Soros seems to be leading other investments in putting money in the crypto market. The billionaire investor has now pledged that his fund management, which exceeds $26 billion, will trade in cryptocurrencies. Likewise, Venrock, the Rockefeller based company, has aligned itself with Coinfund to invest in digital currencies.

The latest institutional interest in cryptocurrencies is largely driven by the fact that this class of investors does not want to be left behind because cryptos became a feasible asset class, they run the risk of becoming irrelevant in the long run.

Clarence Wooten, founder and CEO of RoleCoin by STEAMRole says,
“Because blockchains are decentralized and globally distributed they are here to stay. It’s a disruptive asset class that will win across many sectors in the long term. So the crypto asset class is too attractive long term to ignore. To ignore it and not find a way to participate won’t make it go away. So despite its volatility, you have to find a way to participate or risk being disrupted or becoming irrelevant.”

Though regulation has been a turn-off for bad actors, Alicia Belzberg, CEO of
Infinigon Group believes the improving clarity on regulations guiding cryptocurrencies could also be enticing institutional investors.

“Another important factor is the improving regulatory clarity surrounding the cryptocurrencies ecosystem, both within the United States and globally. Several countries have deemed Bitcoin as well as other cryptocurrencies, legal tender. Furthermore, institutional investors have, by now, acquired a critical mass of knowledge and understanding necessary to perceive the technology underlying cryptocurrencies as useful,” she says.

Strategic Investments

Institutional investors are increasingly starting to view cryptocurrencies as strategic investments. As they gain more education on their mission, Denis Farnosov, founder of
AlfaToken notes that the ability of blockchain technology to cause fundamental changes in different markets seems to pick the interest of these investors who prefer long term investments.

“Institutional investors see the mission behind cryptocurrencies and blockchain. They are attracted by the fundamental changes that can be made in a number of markets. They are patient, long-term investors. Their horizon is 5 years or more. They are not betting on a single cryptocurrency but the entire asset class. Third, they realize there is increased demand from companies, particularly across Europe to invest directly in cryptocurrencies. Institutional investors want to be profitable in the long run and not miss out on important innovation,” he says.

Market Volatility

It remains to be seen whether the involvement of institutional investors will affect volatility, but as government regulations tighten, there will be less uncertainties. Licensed intermediaries will act on behalf of clients, in some cases, holding digital assets in trust in the event of potential liabilities, or at best, to safeguard digital currencies for holders.

For some, Bitcoin hasn’t passed fiduciary laws even at the base levels, nor are there any ways to prove ownership or to conduct due diligence. Until then, these investors will remain on the sidelines.

Skeptics still believe cryptocurrencies will fail and that prices will remain at their February lows, or worse. However, the entry of institutional investors will catalyze market growth due to the money they possess the money and the credibility they bring to the cryptocurrency market. Other companies on Wall Street are showing active interest. The question now is not whether or not institutional investors will join in, but when.

Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.

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