Could traditional platforms win from the crypto winter?

New research has found that the market turmoil caused by the recent crypto chaos is pushing institutional investors towards traditional regulated exchanges as their route into the digital assets arena.

Up until now the crypto space has been dominated first by retail investors, and at a provider level by crypto-native firms – but as institutional interest in the industry grows, both of those things are starting to change.

With the collapse of FTX signalling the latest correction in the market, a new report by Acuiti and Eurex has found that although the recent chaos may have had negative financial and reputational consequences for investors, traditional channels could actually benefit from the situation as institutional investors still keen on digital asset exposure seek safety and security.

Although some firms have taken to the native crypto markets, of the 191 buy- and sell-side firms surveyed, the report found that most institutions remain cautious about how they trade – with many looking to gain exposure through the venues where they already trade established asset classes – a trend that is likely to influence the next phase of evolution for the crypto market.

“This is particularly the case for institutions that want to trade exposure to digital assets but don’t need to optimise their strategies by trading against retail flow,” said the report.

Institutional investors have been slow to tap the trading of crypto native assets so far – largely due to a combination of regulatory constraints and risk aversion, a topic which happens to be the central theme of The TRADE’s upcoming Digital Assets Roundtable, of which more to come.

But despite the plummeting prices this year, digital assets have become one of the hottest topics of 2022 – with the key question now looking to be how firms can navigate the market volatility in order to integrate these assets into their institutional portfolios.

There is an argument for decentralised finance (particularly strong from crypto native voices), which suggests that given its transparency, had FTX been a DeFi firm, the collapse may well not have happened due to blockchain accountability, which would have highlighted the movement of funds rather than allowing the alleged fraud to occur behind closed doors. But right now, in the institutional space at least, the movement would seem to be in the other direction, retreating back to centralised pathways with a preference for traditional (and regulated) exchanges in order to achieve exposure without opening up to undue risk.

“A continued run of bankruptcies in the native crypto markets, including high profile names such as FTX, have given institutional investors cause to pause and reassess how best to add digital assets to their portfolios,” confirmed Acuiti’s head of research, Ross Lancaster.

“Against that backdrop, the attraction of exchange traded products on traditional venues, which continue to grow in sophistication, is only likely to increase.”

The increase in institutional interest is also driving a demand for new products, as well as developing the range and breadth of trading strategies that can be enacted on traditional venues – with cryptocurrency derivatives and ETPs at the front of the charge, resulting in greater diversity of available products on-exchange.