Experts say cryptocurrencies are seeing increased interest from institutions – including wealth managers. finews.asia lays out why.
A discussion on the institutionalization of cryptocurrency trading was surprisingly crowded compared to the other topics on offer at a conference of institutional foreign exchange market participants in Singapore.
«Five years ago we were talking to hackers, today we are talking to bankers. We are seeing institutions wanting exposure to this asset class,» said Ville Oehman, co-founder of Blockchain Technologies SPC.
«Institutional investors are starting to take this asset class seriously,» concurred Quentin Miller, head of institutional foreign exchange at LMAX Exchange, who spoke at a roundtable discussion.
Wild Price Swings
The opportunities for capital gains plus a change in tone amongst influential investors have drawn the attention of financial institutions and wealth managers recently, Su Zhu, chief investment officer of Three Arrows Capital, said at the conference.
«The adoption has been partly driven by price-action,» said Zhu. He also noted that famous institutional investors, such as Muhammed El-Erian, chief economic advisor at Allianz, was slightly «anti-bitcoin» at the beginning, but now appears to have softened his tone.
Augur Changes His Tune
El-Erian, one of the world's most respected investors, was quoted on television by «CNBC» last September saying that Bitcoin is «disruptive» technology which will not see widespread use. He also said that Bitcoin cannot be considered as a form of currency, as reported by «iq option». Bitcoin was trading around $4,000 at that time.
In the three months following El-Erian's comments, Bitcoin saw a meteoric rise in price until December last year. It subsequently collapsed from its peak price of around $20,000.
Fast forward to June this year, when El-Erian said that Bitcoin is a «buy» below US$5,000 in another «CNBC» interview. At the time of that interview, Bitcoin was trading around $5,870.
Nascent Market Structure
In terms of volatility and liquidity, the trading of cryptocurrencies is still rather illiquid and volatile, QCP Capital managing director Darius Sit said at the conference.
«The way we trade cryptocurrencies is very similar to trading forex over the counter. The difference is in the maturity of the infrastructure – settlements are still very medieval, with no centralized settlement. There are idiosyncrasies around,» acknowledged Sit.
Possibly Lower Volatility
One good thing that has come out from the recent price corrections of cryptocurrencies is the maturing of investors and development of new tools.
Su Zhu pointed out that there are now «borrowing pools» from long-term investors coupled with instruments being made available for investors to hedge their positions.«The market is offering ways to short, so volatility can go lower,» said Zhu.
Previously, cryptocurrency investors had no other options but to dump the coin if they wish to cut losses. «There were no means for investors to hedge their positions...but with the emergence of automated bots, they may hedge against volatility, » said Sit.
Some Way To Go
In order for wider institutional acceptance, the infrastructure for regulation, custody, and criminal detection have to be in place, experts say. «We need to make sure that the cryptos are fully insured. We try to make sure we have the same kind of checks as in fiat currency trading,» said Miller of LMAX Exchange.
Meanwhile, market participants are in active discussions, trying to segregate various cryptocurrencies.
«What we are starting to see is some kind of segregation by the market and what this asset belongs to. Which bracket of the regulation these assets fall under, who will give the licence and what are the responsibilities of the coin issuers, etc,» Miller added.
Advice For New Investors
Investors into the new asset class should understand the value of the services or products tied to the crypto assets, the panelists said.
«Do your KYC – know your custodian. Know who actually have the assets, who can move the assets, what the set-up is, the insurance involved, the parties behind it, and the regulatory boundaries,» advised Oehman.
