Following the colossal rise of cryptocurrencies in 2017, a sudden reversal in the market sent valuations and market cap growth into a steep decline, resulting in the downturn known by most as “crypto winter”. While many had hoped for a rebound, the bear market has now persisted for an entire year and is still very much in effect today. As crypto companies continue to grapple with diminishing capital, they are facing mounting pressure. In recent months, the industry has been plagued with numerous reports of layoffs, collapsing divisions, and ongoing restructures.
But while the harsh market climate appears to have taken a toll on many projects within the space, investors continue to maintain their optimism for the future of crypto assets, with institutional investors becoming more heavily invested in the space, possibly ushering in the green shoots of a “crypto spring”.
New asset class, new opportunities
Institutional investors are always looking for asset classes they can model and apply strategies to that will yield consistent profits over time. As an emerging asset class, crypto presents an opportunity for diversification, and if the market does take off, institutional investors don’t want to be caught short and under-allocated. Previously, the sheer volatility and lack of regulation in this nascent industry made investors hesitant to enter the crypto market.
But the growing volume of crypto assets in the market shows that institutional attitudes have begun to shift. In fact, institutional players have already been preparing for this shift. Morgan Stanley estimates that, combined, hedge funds, venture capital firms, and private equity houses have increased the number of cryptocurrency funds five times since 2016. Their combined value has grown from $675 million in January 2017 to $7.1 billion in October 2018, while leading tech VC firm Andreessen Horowitz is investing aggressively through its $300 million crypto-focused fund.
Clearer regulations boost legitimacy
Over the past year, the steady arrival of regulatory clarity in the space has moved the industry towards a more robust, sophisticated state. Traditional financial hubs like London, Hong Kong, Singapore, and Switzerland have shown a progressive stance towards balancing regulation with consumer and investor best interests. For example, Singapore has introduced a Fintech Regulatory Sandbox, Hong Kong has its Fintech Supervisory Sandbox, and the Financial Conduct Authority in the UK published regulatory guidelines. These measures bring greater legitimacy and structure to the industry, making it easier for traditional financial players and institutions to enter and participate.
The participation of large financial institutions and exchanges like Fidelity, Nasdaq, and Goldman Sachs further cement crypto as a legitimate digital asset. Their involvement will boost interest from venture capital firms and family offices, and their entrance will equally set a more professional tone for the industry. The arrival of new investment models such as crypto Exchange-Traded Funds are positive hallmarks of a maturing industry. A possible Bitcoin ETF, for example, could bring new and accredited investors to the space, garnering interest from traditional players on Wall Street.
Institutional participation to help balance the scales
Currently, “whales” who possess significant crypto holdings are able to distort prices in the market. Institutional players can, therefore, act as an anchor and contribute to price stability, as they are largely restricted in their ability to manipulate the markets. Increased institutional interest will not only offer a fresh inflow of capital and liquidity but will also give rise to the development of new regulatory frameworks, ultimately lending more credibility to the crypto trading space and supporting the continued growth of the industry overall.
While the reputation of cryptocurrencies has taken a battering, there is actually a silver lining. The year-long bear market has given the ecosystem a healthy cleansing, effectively separating the long-term value creators from the short-term day traders. The crypto market is no longer a playground for those simply looking to earn quick wins by cashing in on the hype. Rather, it has become a sandbox for savvy investors with real money being channeled into the growth of the blockchain and crypto industry as a whole.
Driving acceptance through compelling use cases
As industry newcomers grow more cognizant of blockchain’s potential, the crypto market is becoming increasingly hard to ignore. Unless investors want to completely write it off, they would benefit from learning more about this emerging asset class. Ten to 15 percent of venture capitalists are already making inroads, and more will soon follow.
The arrival of strong projects supported by technical excellence and experienced leadership teams has given the industry a much-needed focus on developing compelling use cases and solutions with real-world applications. Traditional venture capitalists and institutional firms are jostling for top investment space as they look not only to diversifying their portfolio but also to fund the next breakout blockchain project. Should this trend continue, this year will be one of tremendous growth for the industry as a whole.
Roger Lim is Founding Partner at NEO Global Capital (NGC).