Institutional investors begin to influence digital asset market structure

Following increased activity in digital assets from traditional institutional investors, the market structure is evolving to meet their needs and preferences.

Digital asset market structure, initially built to address the needs of retail and high-net-worth investors primarily, is coming under the increasing influence of institutional investors.

A new report by Coalition Greenwich, “Digital Asset Market Structure: Institutions Take the Reins”, predicts that crypto market structure will increasingly be influenced by the demands of institutional investors and traders.

“There are a seemingly countless number of firms moving in to fill the gaps for institutional trading of digital assets, such as trading platforms, prime services, market making, surveillance, analytics, custody, and settlement,” said David Easthope, senior analyst for Coalition Greenwich Market Structure & Technology.

Shifts in the market from spot trading and physical ownership to both physical and financial instrument ownership, including, for example, futures and ETFs, have seen the market begin to adapt to the traditional needs of institutional investors.

A survey by Coalition Greenwich found that exchange-traded funds/products are favoured by 61% of buy-side institutions, compared to 27% for direct physical ownership.

In addition, as liquidity-seeking transforms from request-for-quote (RFQ) to streaming prices and order books, Coalition Greenwich said that fully decentralised exchanges have also emerged to offer new models and competition to exchanges, broker-dealers and alternative trading systems (ATSs).

“This next phase in the evolution of crypto market structure will be highly dependent on how market participants approach the breadth of digital assets, and how regulators balance investor protection and ensure market integrity, while also supporting technology innovation and the growth of deep and liquid markets,” said Easthope.