In a discussion, that we recently had with the team at AAX, this idea came up: “Just as the laws of physics held within them the possibility of gems, oil and precious metals – fine art even – so, within the perfect balance of mathematics we find the possibility of Bitcoin. It starts as an object of curiosity, evolves to a commodity or a collectible of some sorts, and it’s now taking on the form of a purely virtual, but uniquely real, asset class.”
For years, participants in crypto have been anticipating the entry of institutional investors, and with it the legitimacy of a globally recognized asset, painting that moment as the big breakthrough that will catapult Bitcoin to its true value.
Of course, rather than a single event, the entry of the regulated high-rollers is a gradual process that requires dialogue, innovation and time, and while little can be said about the impact this will have on price, we can say that the inflow of institutional capital is likely to bring more stability into this otherwise volatile market.
The presence of institutions can also be expected to drive the articulation and implementation of stricter standards of accountability and due diligence – vital to an industry that has been a favored target for scammers and hackers alike. In 2019 alone, according to Forbes, around US$4 billion worth of crypto has been stolen. In fact, since 2011, hacks and other compromises of crypto assets have resulted in at least US$9.8 billion in losses at current prices and that does not even include those losses that have not been publicly disclosed.
Admittedly, not everyone is ‘over the moon’ about this prospect. For some, the very idea of large institutions and corporations entering the crypto space constitutes a clash of civilizations, the argument being that it would violate the principles underlying blockchain technology and the ‘Nakamotonian’ vision for a decentralized economy. Also, for as long as there is limited liquidity , an institutional rush to the market could potentially wreak havoc to fiat currency balances and cause intolerable conditions in the derivatives space. Especially on those venues where systems have not been designed to handle institutional order volumes – not just in terms of order book depth, but also in the underlying technology and its capability to match and execute orders with sufficient speed and accuracy.
Taking it to the next level
In spite of these reservations, as we’ve argued before, we need to move beyond polarity and find a way to connect the decentralized crypto community with the regulated investment community for optimal market conditions and performance. In that regard, we were pleased to learn that 47% of institutional investors that took part in a Fidelity-led survey have indicated that they are open to include digital assets in their portfolio in the near future.
But it’s not just increased attention from institutional investors that should be of interest. Equally relevant is the work being done by Central Banks, in particular around the design of Central Bank Digital Currencies. If only because it shows that blockchain technology and the associated asset class is being taken seriously (both as a threat and an opportunity). Similarly, rather than just observing from the sidelines, ever since the proposal of Facebook’s Libra, regulators have been proactive in their search for an appropriate framework to protect professional and retail traders as well as monetary policies (or at least the ability to shape them).
At the same time, irrespective of these developments, more time is needed for the mainstream to understand what cryptocurrency really is – but for anyone who sees the digital world as a real and lasting space for human interaction and productivity, the idea of a digital-native commodity that is scarce, unique and valued, must be appealing. Such optimism is indeed reflected in the numbers.
According to a recent report by PwC, in 2020, family offices (48%) and high-net worth individuals (42%), together make up 90% of all institutional participants in the crypto space. Most participants have adopted a quantitative trading strategy. From the report, we also learn that in 2019 the percentage of hedge funds managing more than $20mil in crypto assets has risen from 19% to 35%. And it’s not just trading – a good portion of hedge funds have also shown to be keen participants in staking (42%), lending (38%) and borrowing (27%) schemes.
At AAX, we watch these developments very closely. Since founding the digital asset exchange in 2018, and in building up the infrastructure, we’ve sought to secure a delicate balance that makes it easy for retail traders to trade with us, but also offers the quality and level of market integrity expected by the institutions. To that effect, we’re
- the first crypto exchange to have adopted LSEG Technology’s matching engine, for optimal performance;
- the first to have joined London Stock Exchange Group’s Partner Platform, making it easier to onboard institutional clients;
- implementing cutting-edge market surveillance technologies, in partnership with Solidus Labs;
- now able to offer world-class custody with well-established and highly respected participants in finance (upon request);
- offering the option to trade with AAX via Copper’s ClearLoop for cutting-edge off-exchange settlements – the ideal solution for arbitrage traders;
- working to enable FIX connectivity with the appropriate risk checks in place;
- expanding our suite of services and offerings, at once giving our clients access to fiat trading via our over-the-counter trading desk, spot trading across a variety of high quality crypto assets, and perpetual contract trading (with high leverage) on our crypto derivatives markets.
Perhaps the institutional onrush is not yet happening, but it certainly seems the space is moving in that direction and we need to get ready, and build our systems up to a standard that works for both retail and institutional investors – and it should stand up to regulatory scrutiny. But that regulation, and the way institutional participation will look, is something we can help shape and define.
Over the coming months, as we consolidate our venue, we’re very keen on continuing our discussions with our colleagues and associates, so together we can bring this investment space to the next level. And considering the unique economic and socio-political condition that we find ourselves in today, it seems like the best time to do so.
About the Author
Thor Chan is the Chief Executive Officer at AAX. He was previously licensed in Hong Kong to manage equities and derivatives brokerage and trading operations. He’s held various roles, including Deputy COO at FDT Group, and product management roles at App Annie, Microsoft, Publicis, and HSBC.
AAX is the world’s first digital asset exchange to be powered by LSEG Technology. Offering OTC, spot, and futures, it provides a highly secure, deeply liquid and ultra-low latency trading environment; and a meeting point between crypto and global finance. To learn more, go to aax.com