We are in the midst of a crypto bear market. Crypto valuations have been down 70% since their high of 2021, in line with the overall US securities market. But perhaps we should see the increasing correlation of crypto markets with the US stock market as an indication of the maturity that the crypto sector has gained since the last crypto winter.
This increasing correlation between crypto markets and US equities may, in fact, partially be a function of the amount of institutional money that has flowed into the crypto market over the past couple of years, according to Arcane Research, a crypto analytics company.
A clear sign of the growing interest of institutional investors in crypto is that even the bearish market conditions have not deterred some firms in the traditional financial (TradFi) space from putting their money in crypto, or furthering their plans to offer crypto investment options to their clients. This points to the argument that a crypto bear market is the time to develop growth strategies, and play the long game.
Let’s take a look at which TradFi firms are still bullish on crypto and what moves they are making.
US-based JPMorgan Chase (JPM) hinted at a crypto recovery in an analyst note at the end of June this year. The bank said that the current downturn in the crypto market may be nearing its end “given the fact that crypto entities with the stronger balance sheets are currently stepping in to help contain the contagion”. The note referred to crypto firms like FTX reportedly looking to buy out the assets of highly-leveraged companies such as Three Arrows and Celsius.
JPM also used blockchain for a collateral settlement on May 20th, 2022. The bank transferred tokens representing the money market shares of BlackRock Inc on its private blockchain as collateral. JPM says the use of blockchain to settle transactions will allow investors to settle trades outside of market hours as well as use a wider range of assets as collateral.
Goldman Sachs, a leading global investment bank, in July used blockchain to settle a security lending deal with BNY Mellon. The two financial institutions settled a transaction worth “hundreds of millions of dollars” using digital records. Earlier this year, Goldman had also partnered with Coinbase to offer its first bitcoin-backed loan.
The vote of confidence in favor of crypto is not limited only to US financial entities. In the UK, Barclays is reportedly putting in “millions of dollars” to buy a stake in Copper, a company that provides custodial services to institutional investors, among other things.
France’s BNP Paribas is also looking to enter the crypto custody space, Coinbase reported on July 19. The bank, which has nearly $13 trillion in assets under custody and is one of the largest French banks, has partnered with Metaco for its crypto push.
Metaco, a Swiss tech company, is also a partner to Citibank and Societe Generale (SocGen), as part of the banks’ focus on tokenizing securities. Citi’s Securities Services team will work with Metaco to focus on “tokenized securities: representations of stocks and bonds moved around and settled using blockchain tech”. Meanwhile, SocGen’s FORGE, its digital assets subsidiary, will work with Metaco to issue, invest and manage their digital native security tokens issued on a blockchain.
Brazilian banks are leading the way in crypto adoption among retail banks. Itau Unibanco said in July that it was considering allowing retail investors to buy and sell cryptocurrencies. Itau, which is Brazil’s largest private lender, was also looking to launch an asset tokenization platform and custody services for its institutional investors.
Banco Santander, the Brazilian subsidiary of Spain’s Santander Group, said in late July that it was also looking to launch crypto trading services for its clients. Nubank, Brazil’s largest digital bank, launched its crypto trading platform in June, and last month reached 1M users on the platform. The company had expected to reach the milestone in a year, but outdid the expectation by 11 months.
In the US, Huntingdon Valley Bank, a 100-year old community bank, opened a stablecoin vault with MakerDAO in July this year. The bank will be able to borrow $100M worth of DAI tokens, with the option of this credit line going up to $1B over the next 12 months.
Even though the Bank for International Settlements has been skeptical in its approach towards cryptocurrencies, it said in July that banks can have up to 1% of their reserves in crypto assets.
Hedge funds have led investments in crypto, with 38% traditional hedge funds investing in digital assets, according to a PricewaterCoopers report. And they are continuing this trend in the bear market.
Citadel Securities, a sister company of hedge fund Citadel, is reportedly building a “crypto trading ecosystem”. The company has so far partnered with Virtu Financial, Sequoia Capital, and Paradigm for this initiative. More wealth managers and market makers are expected to join the consortium as the marketplace nears launch.
Point72 Ventures, billionaire Steve Cohen’s hedge fund, participated in a $20M funding round for a decentralized finance (DeFi) firm focused on data and trade execution for institutions. The hedge fund has also been beefing up its crypto unit staff. Among other positions, Point72 is hiring a crypto technology head who will report to the hedge fund’s chief tech officer.
Brokerage Firms and Market Makers
The digital assets arm of brokerage firm Fidelity Investments said in May that it would add 110 developers and engineers to its workforce. In addition, it plans to add 100 customer service specialists. Fidelity’s digital assets unit was launched in 2018 to allow institutional investors to trade in BTC and crypto. The announcement came after the retirement plan provider said in April 2022 that it would allow crypto exposure for its 401(K) retirement accounts.
MicroStrategy doubled down on its crypto offensive and disclosed in its regulatory filings that it had put in $10M in BTC, purchasing nearly 480 bitcoins. The company started investing in BTC for the first time in August 2020, and so far has nearly $4B locked in BTC.
TradFi and DeFi come together
For a long time, the debate in institutional investment in crypto was about TradFi vs DeFi. The increasing popularity of DeFi was often considered a death knell for TradFi. However, the digital asset management strategies of a number of TradFi companies in the downturn point to the fact that TradFi and DeFi will complement each other in the future. After all, it is all about the long game.
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