The institutionalization of cryptocurrencies

Blockchain technology is now nearing its tenth year in existence. And what a decade it’s been. From government-agnostic means of trustlessly exchanging wealth, to the creation of platforms allowing for self-enforcing smart contracts, the blockchain space has been an unrelenting juggernaut of innovation.

In this time, there has been a certain degree of animosity from legacy financial institutions towards cryptocurrencies – and some of that sentiment continues to pervade, but the technological tour-de-force of digital moneys is quickly eradicating skepticism across the board. Once confined to a niche of computer scientists and libertarians, Bitcoin and similar cryptocurrencies have become a hot topic with major players and retail investors alike.

If I had to pinpoint a specific moment when everything changed, I would point to December 2017 – a meteoric rally that saw Bitcoin reach heights of $20k. As it became a focal point for the media, the demand for serious financial tools pertaining to the asset also began to rise. We saw the appearance of Bitcoin futures, and two institutions complete the first exchange for physical (EFP) transactions involving these. And now, it looks like things are about to be taken a step further with the ongoing buzz around ETFs.

We’re now seeing a lot of work being done in the space integrating blockchain technology into finance, not only at the trading level, but also at the operational one (as a means to streamline processes within the legacy infrastructure). The growing popularity of security tokens (versus utility tokens), backed by tangible assets, is an example of how the technology can be used to improve proof-of-ownership and to speed up clearing and settlement times.

We have to accept, of course, that these changes are not going to occur overnight. There’s a long road ahead, with regards to establishing regulation and jurisdiction, but that said, it’s being marched along at an impressive pace. To further boost these efforts, it’s of vital importance that we not only educate investors, but make the transition from traditional assets to the realm of cryptocurrency as seamless as possible.

There’s an ethos in Bitcoin that people should be in complete control of their private keys (that allow them to freely spend their funds, without third-party involvement). Obviously, this is a fantastic feature and a true reaffirmation of the self-governing nature of cryptocurrencies. But it’s wrong to assume that this is a good strategy for most – particularly given the degree of technical knowledge required to secure and transfer Bitcoin. For those with large amounts of coins that wish to transact rapidly and securely, there’s a need for institutional-grade software to interface with the various exchanges, provide effective storage solutions, and overlay protocols with a more familiar UI/UX.

Cryptocurrency exchanges, in their current iteration, leave much to be desired – it’s impossible for a trader to conduct their business without being signed up to myriad exchanges (in order to gain access to the markets for specific coins). This fragmented landscape is a major obstacle to liquidity, and it’s a problem that simply can’t be ignored if we want to see institutional adoption of the budding asset class.

The opportunity is certainly there: many exchanges have APIs (ranging in capability and functionality) that allow traders to write sophisticated algorithms or programs to serve a range of purposes – engaging in arbitrage, setting custom stop-losses or routinely buying specific coins if stipulated conditions are met. What’s needed now is for veteran investors in traditional assets to weigh in on how to deliver a fully-fledged trading platform, incorporating high-level tools like Portfolio, Order, Execution and Risk Management Systems that can easily interface with dozens of exchanges by incorporating their APIs.

What we’re currently observing with Bitcoin and similar offerings is the Lindy effect: though cryptocurrency is frequently pronounced dead, it’s clearly not the case, and the longer it persists, the longer it’s anticipated to survive. I believe institutional firms and investors are beginning to realise this, and even the cynics are changing their tune. The institutionalization of cryptocurrency is underway, and it’s a growing trend in finance. And comprehensive and accessible trading stacks for professional traders are key if this trend is to continue.

David Wills is Caspian’s COO and co-founder. He has served as Kenetic COO since inception. Prior to that David spent 10 years as managing director and head of Asia trading at Och-Ziff Capital and was the former chairperson of HKeX Hedge Fund market council. David holds a BA in Psychology and B.Comm. in Finance & Economics from the University of Sydney


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