Are institutions capitalising on the crypto market downtrend?

Are institutions capitalising on the crypto market downtrend?

Bear markets exhibit uncertainty, but they represent opportunity and change.

This year’s crypto market decline has certainly pushed many investors into a risk-off state. Coupled with a few “black swan” events, it may take some time for markets to fully recover and investor confidence to be restored again.

But this has not stopped some institutions, who seem undeterred by crypto’s price decline, from moving against the trend as they roll out their own crypto-based products this year. Are they strategically positioning themselves for when markets recover? Or are they capitalising on the growing demand from institutions and remain confident in crypto’s future upside potential?

A bear market or an evolving ecosystem?

Bear markets typically indicate uncertainty and doubt, but they also represent opportunity and change:

  • For investors to identify quality and robustness in crypto companies
  • To weed out non-credible players and bad actors as market hype has time to cool off
  • To open market entry or investment opportunities with reduced asset prices and company valuations
  • To allow a more rational overview of the market (adjusting after peak bull-cycle periods)
  • To give time for regulatory progress, possibly in response to market dynamics, as regulators incorporate compliance and control measures for consumers and crypto businesses

These are all essential elements of a maturing blockchain ecosystem and establishing the right balance between crypto’s rapid innovation and a safer user experience that can support wider adoption.

Ecosystem maturity

Despite crypto’s infancy, its ecosystem is quickly maturing. Infrastructure is becoming more sophisticated and adaptable, whereas crypto regulation is becoming more effective and enforceable. At the same time, blockchain’s agnostic nature means new venture capital (VC) investments remain relatively robust despite this year’s market downturn.

Evolving investment infrastructure has also attracted the interest of institutional investors, making diversification opportunities more appealing than ever before. This is also due to many new blockchain technologies adopting strong on-chain governance systems, sustainable staking economics and improved connectivity to traditional financial markets. Like traditional financial intermediaries, many crypto companies now employ compliance and legal teams, financial experts and security professionals.

The world’s largest are moving against the trend

A broader perspective reveals that institutional demand for crypto assets has only continued to grow year-after-year. Hence, some of the world’s market leaders have publicly committed to the blockchain sector as they begin launching their own crypto-based products to facilitate broader institutional participation.

  • The world’s largest asset manager – BlackRock: Currently holding over USD 10 trillion in assets under management (AuM), BlackRock began offering its first ever crypto-investment product in August 2022, effectively expanding institutional access to crypto.
  • The world’s largest bank (by market capitalisation) – JPMorgan: JPMorgan launched several crypto funds, recently built its blockchain-based trading platform, and opened its virtual bank brand in Decentraland’s metaverse. JPMorgan recently unveiled an ambitious scheme to bring trillions of dollars via their Onyx Digital Asset platform into decentralised finance (DeFi) by tokenizing US treasuries or money market fund shares and using them as collateral in DeFi pools.
  • The world’s largest manufacturer of mobile phones – Samsung: Samsung Securities (the group’s financial division) is currently working with South Korea’s financial regulator to launch its own crypto exchange in early 2023. In January, the tech giant also opened a virtual store in Decentraland’s metaverse, and in May, it began incorporating a Non-Fungible Token (NFT) functionality into its smart TVs.

What is driving institutional engagement in crypto assets?

These market leaders represent the broader trend: major institutions are doubling down on crypto this year – with similar initiatives from the likes of Charles Schwab, Fidelity, DBS, Commerzbank, Franklin Templeton, Nasdaq and the Depository Trust and Clearing Corporation (DTCC), to name a few. It is a trend that demonstrates the evolving nature of the crypto ecosystem, which can be broken down into three main drivers:

Investment infrastructure: Initially, the regulated offering for crypto options was Grayscale’s Bitcoin Trust or CME Group’s Bitcoin futures. Today, a growing number of institutional-grade products makes both direct and indirect crypto exposure possible and provide a wider range of diversification opportunities.

Regulatory clarity: Institutional barriers are gradually being lifted as regulators begin incorporating crypto into their legislative frameworks. Many regulators are tightening the controls on crypto service providers in order to combat illegal activities in connection with crypto transactions. Institutions now have various options to use regulated crypto services that ensure customer protection, anti-money laundering (AML) and compliance measures are always respected. There are also several international initiatives (MiCA and BIS Innovation Hub to name two) that aim to establish a more effective licencing and crypto asset classification.

New investment opportunities: Blockchain’s rapid innovation continues to spur on new investment opportunities (including DeFi, NFTs or the metaverse). This includes major technological advancements, such as alternative Layer-1, Layer-2 and scaling solutions. Ethereum’s recent success has also increased its appeal to ESG-focused investors, as the industry shifts towards energy-sustainable proof-of-stake (PoS) blockchain technology. For example, the reduction in ETH’s energy consumption (by 99.95 percent), when it ceased being a proof-of-work (PoW) blockchain, has the potential to turn ETH (and thousands of ETH-based applications) into ESG-friendly assets.

Trust in crypto holds its ground It seems not all trends are negative. Despite market adversities in 2022, crypto has (for the most part) maintained the trust of many institutional investors across the globe. A few recent studies support this claim:

  • Bitstamp: 67 percent of institutional investors still deemed crypto as trustworthy despite a 3 percent decline since the first quarter of 2022. In addition, 80 percent believe it will overtake traditional investment vehicles and one in four plan to make crypto a primary source of investment[1].
  • PwC: Crypto investment from traditional hedge funds nearly doubled in 2022, from 21 percent in 2021 to 38 percent in 2022[2].
  • KPMG: Crypto companies raised USD 14.2 billion in funding in the first half of 2022 “despite significant challenges”[3].

Concluding remarks Even if bear markets push many investors into a risk-off state, they should also look beyond price action and focus on what is being developed around the blockchain ecosystem. It appears that institutional interest and activity is far from withering, as many large financial institutions look to capitalise on the 2022 market downturn.

Crypto’s advancing infrastructure and investor trust remains relatively strong as many hold a prospective outlook on crypto’s future upside potential. Market leaders (and other institutions) are moving against the trend. They understand the institutional need for security and trust, and the right infrastructure will facilitate the institutional adoption of crypto even further. This is a long-term game.

Learn more about digital asset banking at Sygnum here.

[1] Bitstamp: Global Crypto Survey Report. August 30, 2022: https://blog.bitstamp.net/post/crypto-pulse-q2/

[2]4th Annual Global Crypto Hedge Fund Report. June 8, 2022: https://www.pwc.com/gx/en/financial-services/pdf/4th-annual-global-crypto-hedge-fund-report-june-2022.pdf

[3]Pulse of Fintech Report H1’22. September 2022: https://assets.kpmg/content/dam/kpmg/sg/pdf/2022/09/pulse-of-fintech-h1-22.pdf

About Sygnum
Sygnum is the world’s first digital asset bank, and a digital asset specialist with global reach. With Sygnum Bank AG’s Swiss banking licence, as well as Sygnum Pte Ltd’s capital markets services (CMS) licence in Singapore, Sygnum empowers institutional and private qualified investors, corporates, banks, and other financial institutions to invest in the digital asset economy with complete trust. Sygnum operates an independently controlled, scalable, and future-proof regulated banking platform. Our interdisciplinary team of banking, investment, and Distributed Ledger Technology (DLT) experts is shaping the development of a trusted digital asset ecosystem. The company is founded on Swiss and Singapore heritage and operates globally. To learn more about Sygnum, please visit www.sygnum.com.

Disclaimer
This document was prepared by Sygnum Bank AG. This document may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affiliates, and partners at the time of writing. The document is for informational purposes only and contains general material. It is for use by the recipient only. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analyses contained in this document have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.

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