“We’re all early” remains a bit of a meme, but a flush of institutional capital could provide a boost to the crypto sector in 2022.
Despite a dour finish, the crypto market had an impressive 2021. Bitcoin (BTC), Ethereum (ETH), and many other cryptocurrencies broke records. Decentralized Finance (DeFi) proved to be an incredibly popular, if somewhat controversial, alternative to traditional finance. Non-fungible tokens (NFTs) have taken the art world by storm, and digital paintings have been sold for millions of dollars.
There have even been some promising noises coming from regulators, particularly in the EU, which has temporarily staved off concerns that governments seek to stop crypto in its tracks.
Despite this, there is still one big thing missing from the cryptocurrency sector: institutional capital.
Although some big players have dipped their toes, they are mostly companies that gear more towards speculative or high-risk investments rather than more traditional institutions. Could 2022 be the year that this changes?
Why Are Institutional Investors Staying Out of the Game?
The biggest barrier to institutional investment is uncertainty. Companies may have the money to risk on things like cryptocurrency, but there is more than just market instability at play.
1. Regulation of Crypto Remains Unclear
Regulations regarding cryptocurrency are still in their infancy, and there has yet to be any consensus regarding how they will be regulated. Even something relatively “simple,” such as which cryptocurrencies also constitute securities, is an incredibly thorny issue.
This uncertainty is further compounded by fears surrounding Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. DeFi and NFTs are both notoriously lax with these issues. This regulatory ambiguity means there is a significant non-market risk for any institutional investor that wants to dip its toes into crypto waters.
2. Crypto Investors Must Hurdle Perceived Risk
In addition, simply buying cryptocurrency comes with perceived risk. Tales of hacks and scams are often blown out of proportion, and it makes cryptocurrency investing seem like there is more peril than in reality.
This perception is made worse by the lackluster approach towards customer service taken by many major exchanges today. Many have poor ratings for customer service and easily lock up funds, leaving investors with few avenues for recourse.
3. Investors Lack Understanding of Crypto
Another very real problem is that most institutional investors still don’t fully understand cryptocurrency. Even “blue-chip” cryptos like Ethereum and Bitcoin still rely on deeply complicated technologies, and this can make it difficult for investors to gauge whether a particular investment is a good choice.
Education remains one of the most important ways to ease institutional capital into the crypto space. Despite the gloomy picture, some innovations on the horizon may help investors overcome their reticence.
4. Forgotten Passwords, Lost Keys, and Cybersecurity
Lastly, with the rise of institutional interest in crypto has also come growing skepticism among some that digital assets aren’t secure enough, given their vulnerability to hacks, not to mention the possibility of simply getting locked out of one’s account due to commonplace human errors – for example, misplacing a piece of paper with a password written down.
While some aspects of these problems will require a longer time horizon to resolve, new solutions are coming into view, such as Multi-party computation (MPC), a cryptographic method that doesn’t depend on a single key, which CYBAVO utilizes.
Cryptocurrency ETFs Offer More Familiar Exposure
Probably the biggest news of 2021 was the release of a series of Bitcoin- and Ethereum-backed exchange-traded funds (ETFs). These crypto securities have opened up an opportunity for institutional investors to gain exposure to the cryptocurrency market without necessarily having to own any tokens themselves.
Similar vehicles, like the Grayscale Bitcoin Investment Trust, existed before 2021, but they were more expensive structures, and they struggled to compete with far cheaper ETF vehicles, specifically due to lower fees. This has lured investors towards these latter options.
This change is significant for two main reasons. First, all seasoned investors understand ETFs, their structure, and their fees, making it far easier for them to justify taking the dip and actually buying some without needing to venture into an online exchange.
Second, most brokers will have access to these ETFs, which reduces friction when attempting to accumulate crypto exposure.
Blue-Chip Cryptos Will Likely Remain King
While those immersed in the crypto world are rushing to buy the latest “moon” coin, the situation is a little different from an institutional perspective. A combination of risk aversion and a lack of familiarity with crypto technology means that most institutional investors will likely turn to the (relatively) safe harbors of the so-called “blue-chip” cryptocurrencies: Bitcoin and Ethereum.
The result is that we should see a steadily increasing demand for BTC and ETH throughout 2022, assuming we’re not entering the dreaded “crypto winter.” This institutional demand should drive prices up, both as investors seek to buy directly, with custodial solutions, or as ETFs buy up BTC to meet demand on the more traditional markets.
It also means that we shouldn’t expect to see institutional capital flow into altcoins with any significant volume. Instead, these low-cap coins will likely remain the preserve of more cryptocurrency-focused investors.
However, there might be some notable exceptions.
Cryptocurrency Companies Could Benefit From Institutional Interest
One way that more risk-tolerant institutional investors might try to benefit from high-potential crypto opportunities is by directly investing in cryptocurrency companies themselves.
This type of investing has the same benefits as an ETF – namely, investing in a company is something that most institutional investors have done themselves in the past. Additionally, an early investment in a cryptocurrency company could come with considerable upside.
There are already several examples of crypto companies that could be candidates for this kind of investment. For example, HIVE Blockchain Technologies Ltd. (NASDAQ: HIVE / TSX-V: HIVE), is a publicly-traded crypto mining company that uses 100% renewable energy to mine, then hold. This concept clearly has power, as HIVE was able to achieve a private placement financing deal worth $115 million in 2021.
It is likely that in 2022, we will see more blockchain-focused companies achieve this kind of success as well – particularly due to a new trend that will have a significant impact on cryptocurrency: the metaverse.
Metaverse and NFT Potential Will Drive Some Big Companies Towards Crypto
Facebook has pivoted hard into the metaverse, even changing its name. This has led to a rush of other companies looking to take advantage of what is likely to be the next big trend.
Somewhat surprisingly, this is excellent news for the crypto space.
Many metaverse projects rely on the idea of limited-run digital assets. The challenge they’re facing is how to make these assets unique while ensuring that they are, in fact, limited. Another big challenge is how to make them tradable across multiple platforms to maximize their value.
The solution to this problem will most likely be non-fungible tokens.
NFTs represent data relating to a specific object that can be digital or physical. However, the token relating to it cannot be replicated; it can only be traded for something else. This restriction means that NFTs can be used to enforce ownership of limited-run digital assets.
NFTs could be a big moneymaker for companies that are moving into the metaverse. They represent an enormous opportunity that could normalize cryptocurrency much faster than originally expected, with play-to-earn (P2E) games in the metaverse adding to the momentum as well.
Ultimately, NFTs could lead to investors in big companies – for example, Disney – deciding to take a closer look at the platforms that host them. It will also lend credibility to any crypto project chosen by those companies and could help raise them to the ranks of “blue-chip” cryptocurrencies like Ethereum or Bitcoin.
A Crypto Winter Would Harm Adoption
While NFTs and the metaverse are promising, there is still one concern hanging in the air. While most of us are hoping for a recovery, the cryptocurrency market has been falling throughout late 2021 and January 2022. If this continues further into the first quarter of 2022, it could result in reduced interest in the cryptocurrency sector – and another long, painful crypto winter, just like in 2018 and 2014.
In that case, institutional investors will likely move on to the next big thing - at least until the crypto markets begin to correct themselves. For the rest of us? I guess we’ll finally have that opportunity to buy the dip.
CYBAVO: The Secure Digital Asset Custody Platform for Enterprises
A founding member of the MPC Alliance, CYBAVO and its team of cybersecurity veterans have become an industry leader in cutting-edge security technology such as Multi-party computation (MPC) and secure digital asset operations for institutions and virtual asset custodians.
CYBAVO VAULT offers many tools to help fund managers, blockchain developers, NFT marketplaces, GameFi developers, crypto exchanges, and many other services manage and secure digital assets, enhance operational efficiency, and ensure regulatory compliance.
CYBAVO’s flagship product, CYBAVO VAULT, is secured through various mechanisms using a defense-in-depth approach, but one of the most important aspects is the correct implementation of MPC to eliminate single points of failure. These single points of failure are often the main contributor to hacks that result from poor private key management or human error.