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Institutionalization of Cryptocurrencies

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The institutionalization of crypto creates a significant alpha opportunity for asset managers. As total cryptocurrencies market capitalization exceeds $2TN, up 40x from 4 years earlier, wealth managers and HNWI are taking note of the remarkable returns and low correlations in this new asset class.

Digital currencies like bitcoin, Ethereum, and dogecoin represent a new frontier for asset managers. These digital assets rely on a computer network with a digital ledger that identifies and validates various interactions. The nascent market represents a host of opportunities from basic savings and investments to provide a means for more efficient and secure interactions like payments and development. 

As more retail investors have shown their appetite for crypto, with a heavy bent of younger men.  It is interesting to see how advanced, independent retail investors have created a momentum that institutions have taken note of. 

Moreover, with more institutional-grade solutions, like full custody, algorithmic offerings come online, the appetite for traditional institutional investors to allocate more in this asset class grows.

However, there continue to be serious considerations for wealth managers considering building out their crypto allocations. The three most salient concerns include:

  • regulatory uncertainty and duties to report
  • continual high volatility can be seen as an opportunity or concern
  • Questions about the enduring nature of cryptocurrencies as an asset class

Money managers who want to capture some of the opportunities in crypto should consider an array of paths. These might include a passive approach to structuring algorithmic trading solutions to match risk appetites.

Thankfully, the rapid growth in institutional solutions has made it easier for asset managers to approach this new asset class. The rush to improve fundamental elements for institutions has been noticeable over the last year. Most notably,

  • Advances in trade execution
  • Assurances of custody 
  • Fund management capabilities

Crypto is rapidly gathering pace as institutional-grade custody, trading and product solutions enter the market, attracting significant attention from and adoption by institutional investors. It is hard to deny that pockets of the crypto market exhibit signs of froth and sharp price swings, as experienced in winter 2021, which are unlikely to go away anytime soon, but the market has proven remarkably resilient through periods of technological, economic, and regulatory upheaval. 

Many investors are taking a long-term view of digital currencies. And although there are numerous hurdles to overcome – not the least is regulation – this asset class holds enormous opportunities for institutional investors.

Moreover, it is clear that the power in this category is far bigger than just a fiat alternative. The power of cryptocurrencies lies in that they may reformulate our entire markets and the nature of how individuals and institutions save and invest.  

As the crypto market continues to grow, it’s important that wealth managers not only stay abreast of crypto growth but also take an active stance towards capitalizing on the market forces. Whether it’s through advanced opportunity identification or automated trade execution, crypto markets remain a high potential source of outsized alpha for asset managers. 

Endotech Alpha

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