Close to $ 1 billion, the capitalization of cryptocurrencies is still small.
The report says that the infrastructure of the cryptocurrency market is still immature.
A survey conducted for eToro among 25 market participants for bitcoin and cryptocurrencies, examines the most important developments in the market, and identifies the main challenges for adoption by institutional asset managers and the trading community.
The survey, released this week, was conducted by the Aite Group, who conducted interviews with liquidity providers, banks, brokers, crypto funds, asset managers and fund managers.
Once the information received was processed, the main factors that could have a negative impact on institutional participation were determined. These are, according to the report: regulatory uncertainty, insufficient presence of traditional custody providers in the market, and insufficient capitalization of the cryptocurrency market, among other factors.
Fragmented regulatory environment
Regarding regulatory uncertainty, the participants in the survey They show preference towards investment options in bitcoin and cryptocurrencies duly regulated.
When asked about their preference of the types of execution venues for institutional participation, regulated markets, such as the CME futures market, ranked at the top, followed by interaction with OTC market makers and exchanges. cash of crypto assets.
The report also noted that unregulated derivatives exchanges ranked last. “This illustrates the general cautious attitude of institutional market participants,” notes eToro.
On the other hand, the report highlights that in the very definition of cryptocurrencies there are inconsistencies between the different regulatorssuch as the Securities and Exchange Commission (SEC), the Internal Revenue Service that regulates taxes (IRS), the Commodity Futures Trading Commission (CFTC) and the Financial Crime Suppression Network (FinCEN) .
Although there are no preferences among those surveyed about how cryptocurrencies should be classified, they “are more concerned with a consistent classification and requirements so that they can engage in commercial activities under a predictable regulatory framework,” the report says.
Cryptocurrency market has room to grow
The market capitalization of cryptocurrencies is still insufficient to attract a greater number of institutional investors to Bitcoin and other cryptocurrencies, the report says. However, he recognizes that the fact of having exceeded one trillion dollars, as reported by CriptoNoticias on January 7, «will undoubtedly attract a growing number of investment institutions to analyze more closely the investment opportunities in the space of the cryptocurrencies ».
The size of the cryptocurrency market has a direct relationship with the liquidity that institutional investors would expect, according to the report.
Factors that influence the liquidity of the cryptocurrency market, according to respondents. Source: eToro.
A high degree of liquidity is a good indicator that the market structure has matured for a particular instrument. Respondents note that when considering various factors that can have a positive impact on overall liquidity in the crypto market, market capitalization came in first with an average score of 4.6 out of 5.
For eToro Business Development Director Tomer Niv, there is room for further growth in institutional investment. “Only by expanding the playing field and facilitating greater participation will cryptocurrencies reach and maintain a market capitalization of USD 2 trillion and more,” said the executive.
Custodial services required
Another aspect analyzed in the survey was the expectations of the respondents regarding custody services. The report states that traditional institutional investors “want to make a decision about exposure to cryptocurrencies and be able to trade them, without having to worry about the technical complexity and risks of storing their own keys.”
Investors expect custody services to employ a traditional custody framework for digital assets, the report notes. Cold storage has become the preferred custody method for institutional investors, the study says.
In 2020 there was an acceleration of the institutional adoption of bitcoin. Among the investment modalities, several companies opted for the acquisition of BTC as a treasury reserve. The first to venture into this investment modality was MicroStrategy, which closed the year with almost USD 2 billion in bitcoin, as we reported in CriptoNoticias.
Also, bitcoin funds, whose most notable case is Grayscale’s bitcoin fund (GBTC), are an important component of institutional investment, since they comprise more than 50% of institutional investments devoted to bitcoin, at the end of 2020, according to bitcointreasuries.org.