Institutional Investors Remain Cautiously Optimistic About Cryptocurrency Despite Setbacks in 2022
Institutional investment in cryptocurrency has been gaining traction in recent years. As digital assets continue to gain mainstream acceptance, more and more institutional investors are seeking to diversify their portfolios with exposure to cryptocurrency. With the arrival of 2023, it is important to look at the current trends and potential changes in institutional investment in cryptocurrency.
One of the key trends in institutional investment is the increasing interest in cryptocurrency-based products and services. This includes cryptocurrency exchange-traded funds (ETFs), custody services, and derivatives. The regulatory environment around cryptocurrency has been evolving rapidly, providing more certainty and comfort for institutional investors.
Another trend is the growing involvement of large financial institutions in the crypto market. Major banks and investment firms are beginning to offer cryptocurrency-related services to their clients, indicating a growing mainstream acceptance of digital assets.
In this article, we will delve into the changes and trends expected in institutional investment in cryptocurrency for 2023. We will explore the factors driving this shift, the key players in the industry, and the potential implications for the broader financial market.
How Crypto Investments on Institutional Level was Doing in 2022?
During the peak of the crypto bull market, many bitcoin maximalists made predictions about the downfall of the old financial system and the widespread adoption of new digital assets. However, the year 2022 revealed a different reality, as the global adoption of cryptocurrencies fell back to traditional financial mechanisms, resulting in a significant failure.
The reversal of the market and the subsequent collapse of Terra, 3AC, and FTX put pressure on the crypto community and the institutions that had entered the market. It is still challenging to measure the reputational impact of this failure. Nevertheless, despite the circumstances, institutional investors have shown a willingness to participate in the market development, while cautiously assessing the risks.
Institutional investors have remained interested in cryptocurrency, as Fidelity’s study showed that the number of institutional investors investing in digital assets rose to 58% in 2022. Some investors reported that digital assets made up more than 50% of their portfolios. Moreover, 81% of those surveyed expressed their opinion that digital assets should be included in a portfolio. This data indicates that many institutions are considering investing in cryptocurrency assets, even if they do not currently own any.
Venture capital and hedge funds also demonstrated exponential interest in digital assets. According to the study, only 12% of the total volume of “interested” investors had owned crypto assets for two years or more. The growing popularity of cryptocurrencies among common users is also inspiring, as the global adoption of digital assets in the retail segment continues to gain momentum. Despite the general bearish sentiment, according to Chainalysis, the penetration of cryptocurrencies into retail markets is growing, and developing countries show the most interest in their global adoption.
The circumstances mentioned above will influence institutional decisions in 2023, as they cannot avoid the potential of digital assets. Although these investments come with high risk, institutional investors are expected to continue to cautiously participate in the market. In the coming year, the industry is expected to see more interest in cryptocurrency-based products and services, such as ETFs, custody services, and derivatives. The regulatory environment around cryptocurrency is also expected to continue evolving rapidly, providing more certainty and comfort for institutional investors.
In conclusion, despite the setbacks faced by the cryptocurrency industry in 2022, institutional investors continue to express interest in digital assets, and the market is expected to continue growing. However, institutions will likely approach cryptocurrency investments cautiously, while also exploring innovative products and services in the sector.
2023 Expectations and Challenges for Crypto Industry
Institutional investors have expressed several concerns regarding the crypto market, including high volatility, a lack of proper regulation, and the possibility of financial destabilization. The issue of volatility is particularly pressing, given that it is a defining feature of the crypto market. The regulatory landscape is also uncertain, with authorities around the world struggling to classify digital assets as securities, money, commodities, or other forms of property. While most investors believe that the development of a legal framework will provide relative stability and increase investor confidence, overly harsh statements from regulators could discourage institutional investors from further investing in the crypto market.
However, the biggest problem facing institutional investors in 2023 may lie outside the digital asset market. A crisis on a much larger scale is looming, with several banks affiliated with tech startups and blockchain companies in trouble. Silvergate Bank, the second-largest digital asset bank in the United States, was the first to suffer. It acted as one of the main crypto-to-fiat gateways, with a turnover of $787 billion in 2021. Unfortunately, its partners were 90% digital asset companies, and when the market went down, its sustainability was called into question. In early March, it became known that Silvergate Bank was winding down its operations and going into voluntary liquidation.
The situation with Signature Bank and Silicon Valley Bank is even more complex when it comes to digital assets. Due to the exclusion of these financial agents from the markets, many major players are experiencing great difficulties with crypto-fiat transactions. This has led to the recognition of a strategic loss of critical infrastructure for the crypto industry. The current state of the US financial market has made investors at all levels nervous, as nobody understands how to hedge against losses.
Cal Evans, a lawyer in the field of technological and crypto projects, has stated that due to the fact that cryptocurrencies are the riskiest asset class, they will be sold first in case a new crisis wave in the markets erupts. This can lead to the most unpredictable consequences for the market. Stablecoin issuers have already felt the pressure: the USDC stablecoin temporarily lost its peg to the US dollar, and from March 13 to 15, its capitalization dwindled by $3 billion amid the Silicon Valley Bank case.
Institutional investors must consider all these factors when making decisions about investing in the crypto market in 2023. While the negative market sentiment of 2022 may have put pressure on the crypto community and institutions bold enough to enter the market, Fidelity’s study showed that the number of institutional investors investing in digital assets rose to 58%. With the exponential interest of venture capital and hedge funds, the global growth of cryptocurrency adoption in the retail segment, and the interest of developing countries in the global adoption of cryptocurrencies, institutional investors cannot ignore the potential of digital assets, despite the risks. However, the uncertain regulatory landscape and the looming crisis in the financial sector may affect their decisions.