Bridging the gap between the Crypto and Institutional Investment Worlds

To the crypto community, the landmark launch of Bitcoin on the Chicago CBOE futures exchange this week was further evidence of cryptocurrency’s increasing legitimacy amongst the professional investment community.

When considered that the move came following announcements from Nasdaq, the world’s second largest exchange, and CME Group that they too will offer similar cryptocurrency derivatives, it would appear that institutional investors may finally be warming to Bitcoin’s offering.

Yet the reality is that most of the traditional investment world remains entrenched in its deep-rooted scepticism of cryptocurrency. In October, for example, the former Chairman of the Federal Reserve, Ben Bernanke, said that Bitcoin is a ‘mostly speculative venture’ that will most likely fail.

These sentiments were echoed in a recent interview by Lloyd Blankfein, Chairman and CEO of Goldman Sachs, who said Bitcoin ‘won’t work out’ and that ‘something that moves up and down 20% in a day doesn’t feel like a store of value’. And whilst over 110 crypto hedge funds have now been launched, take up of cryptocurrency by the world’s main pension funds, insurance companies and mutual funds has been almost non-existent.

Institutional investors are, in the greater scheme of things, risk averse creatures, tending to seek stable long-term returns over a quick buck. The dramatic volatility of Bitcoin this year has offered anything but. Coupled with ongoing concerns over cryptocurrency’s (albeit overexaggerated) connections to crime and the dark web, fear of the Bitcoin bubble bursting and a lack of regulation, transparency and liquidity, it is understandable why institutional investors, with their mindset and culture, have steered clear.

How therefore can the gap between the worlds of cryptocurrency and institutional investment be bridged?

The first gap to bridge concerns the issue of legitimacy. For professional investors to even consider investing in an asset class, it must be legitimate – and in the eyes of many in the community, cryptocurrency is not. The reality however is that although cryptocurrency may be different, that differentiation doesn’t make it, as an asset class, any less legitimate.

Gold, fiat currencies, stamps, wine and tech stocks were at one point all new and different investment options. As asset classes, they may not have played by the traditional rules, or at times even been liked, but that didn’t make them illegitimate. The starting point therefore requires an appreciation on institutional investors’ behalf, irrespective of volatility, decentralisation and risk, of cryptocurrency’s legitimacy.

The second bridge to gap is risk. The dramatic highs and lows of Bitcoin may to institutionalised investors stink of unnecessary risk; but whilst Bitcoin may be cryptocurrency’s notorious poster boy, consider that over 1,300 alternative cryptocurrencies are now in circulation. Many of these alternative currencies offer far more stable, longer returns, essentially operating as asset-backed securities whose value derives from traditional assets such as the US Dollar or gold.

This was the idea behind Bond, a new cryptocurrency that is 100% asset backed against both other cryptocurrencies but also real estate and property bonds. By offering a cryptocurrency backed by a diverse pool of assets, including a traditional growth market that offers steady returns, the aim of Bond is to reduce risk and enable traditional investors to enter the cryptocurrency market with a greater degree of reassurance and confidence.

Finally, the third bridge to gap is trust. With cryptocurrency decentralised and essentially unregulated, the cryptosphere can, to traditional investors, represent something of a Wild West, populated by anti-establishment crypto-cowboys roaming free willy-nilly. The onus therefore must be on the cryptocurrencies themselves to instil reassurance and trust.

Institutional investors are used to, and reassured by, regulation, framework and structure. And whilst these principles might seem at odds with the founding ideals of cryptocurrency, they needn’t be.

Just as with any other investment offering, cryptocurrencies need to transparently demonstrate their USPs, strategy, growth plans and risks from the off. Once investors have bought in, the team behind the cryptocurrency need to offer ongoing support, advice and guidance. Furthermore it helps if the cryptocurrency is available for purchase in conventional means, such as via bank transfer, so that investors can purchase with clarity and ease.

The mechanics, politics and indeed entire concept of cryptocurrency may currently seem alien and unappealing to traditional investment communities. But with a greater emphasis on establishing legitimacy, lowering risk and building trust, a new relationship between crypto and professional investors can be born. Doing so will require changes in mentality from both ends, but it can be achieved.

Robert Edwards, Founder, Bond

www.bondonblockchain.com