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David Drake

April 25, 2018 Article

What Factors are Motivating Institutional Investment in Cryptocurrencies?

After a going through a tough first quarter, the cryptomarket is showing signs of recovery and everyone is noticing its potential.
Just last month, global economies attending the G20 Summit in Argentina acknowledged the that cryptocurrencies and the technology that powers them, blockchain, have the ability to enhance efficiency in the financial sectors.

Attracting Investors
Since the G20 Summit, the nascent industry of cryptocurrencies has captured the interest of governments and institutional investors. Days after the G20 Summit, the UK government launched its fintech sector strategy. One of the key components of the strategy is to increase the country's understanding of the benefits and risks of cryptocurrencies and blockchain with the aim of tapping their potential.
Besides governments, digital currencies have captured the attention of institutional investors. Earlier this month, we saw family offices and venture capital firms enter the cryptocurrency market. One such family offices is the Soros Management Fund whose founder, George Soros, previously termed cryptocurrencies a 'bubble'.
A venture capital firm associated with Rockefeller family, Venrock, is investing in digital currencies and other related projects in partnership with an investment group called CoinFund.

Motivating Factors
But what is causing this flow of institutional capital into the cryptocurrency space? Cryptocurrency players acknowledge that several factors have motivated the entry of institutional investors into the crypto space.
“It could be a simple case of ‘If you can’t beat them, join them’," Vincent Lim, CEO of Fanfare Global, says.
He further notes that being used to large investments, institutional investors may have viewed crypto returns as too little compared to the traditional investments they are accustomed to. However, this is quickly changing.
"Institutional investors have always been the dominant player in stock markets. They have, for the longest time, shied away from ‘betting’ their money on cryptocurrency, looking at it as a playground for individual investors or even geeks. The investment amounts and returns were ‘too small’ for their traditional structured models. But, as the number of individual investors increase exponentially in the cryptocurrency market, with many benefitting hugely from their investments in real dollar value, institutional investors are awakening and finally seeing that there is indeed intrinsic value in cryptocurrency," Lim adds.
Luis Manuel Lopez, General Coordinator at WorkChain Centers, thinks the interest is largely motivated by the drop in cryptocurrency prices.
He says, "Since December 2017 there has been a significant depreciation of the crypto market, with very interesting prices for the entry of large investors."
Further, institutional investors seem to be understanding the role cryptocurrencies can play in different markets and this is motivating them to invest in the market according to Denis Farnosov, founder of AlfaToken.
"First these 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," he says.

Accessing Crypto Assets
As institutional investors now turn their attention to cryptocurrencies, financial companies have already started developing business models to facilitate access to crypto assets for this investor class.
According to a Bloomberg report published this past week, Barclays PLC is considering the possibility of setting up a desk to trade digital currencies targeting institutional investors. At the moment, the financial company is gauging the demand for digital currencies among institutional investors to determine the feasibility of its business model.
Should the company act on it, this move will boost the adoption of virtual assets by institutional investors.
Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.

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