There’s little doubt that the cryptocurrency market holds plenty of potential for key industry players and institutional traders alike over the coming years. Despite a testing 2022, the ecosystem has continued to grow and is forecast to reach new heights by the end of the decade.
With an estimated CAGR of 12.5% between 2023 and 2030, and an estimated revenue of $11.71 billion by the end of the decade, the crypto landscape is set to become a treasure trove of investment opportunities.
As the total cryptocurrency market capitalization illustrates, although the ecosystem sharply retraced from a 2021 peak of almost $3 trillion amidst widespread economic headwinds, its market cap remained at least twice the value of its pre-October 2020 levels for much of its recent downturn–showing invaluable strength in the face of adversity.
Despite these signs of market resilience, institutional investors have struggled to maintain their respective interests in cryptocurrencies. CoinShares data suggests that institutional crypto investments fell by 95% in 2022 in comparison to the heady days of 2021’s bull market.
“Digital assets saw inflows—investors putting money into crypto products—totalling $433 million for the whole of 2022, the lowest since 2018 when there were inflows of only $233 million,” said James Butterfill, head of research at CoinShares.
“It’s definitely quiet now, since 2022, from the institutional side,” added Justin Chapman, global head of Northern Trust’s digital assets and financial markets group. “Before that, we were seeing traditional fund managers looking to launch crypto funds, ETPs in Europe, which is the equivalent of ETFs in the U.S. — that’s really gone quiet. Even the hedge funds, who are pretty active in the markets, have certainly reduced their exposure within that particular space.”
This ambivalence from institutional traders within cryptocurrency markets has been driven by factors that transcend short-term market movements. Complications that stem from issues with liquidity, risk, and compliance have all acted as barriers for institutions operating within the ecosystem, but emerging technology appears set to counter these issues by delivering greater efficiency and scalability within the market.
Institutionally-focused trading terminals like Skarb have sought to break down the existing barriers that institutions face when scaling their crypto trading frameworks. In doing so, Skarb has built a trading ecosystem that has the confidence to look at the potential of crypto and blockchain beyond short-term price movements.
Let’s explore these lingering barriers to entry, and how Skarb is seeking to counter them in its groundbreaking trading terminal:
Overcoming Liquidity Shortfalls
One of the biggest factors that stem the ability of institutional traders to scale their crypto operations comes from a lack of market liquidity.
Because the cryptocurrency market cap fell to around $1 trillion from a peak of $3 trillion by 2023, the entire crypto market stands at just a fraction of the $250 trillion held in the global equities market and the bond market.
This smaller capitalization can deter institutional traders from ramping up their respective crypto exposure due to the sheer lack of liquidity throughout exchanges and the prospect of market manipulation.
Skarb’s unique crypto trading terminal is a comprehensive tool in the cryptocurrency ecosystem for institutional traders–particularly when it comes to overcoming the barriers presented by liquidity issues. This is because the terminal offers a single point of access for traders to manage their trading across different exchanges all within a single terminal.
Through Skarb’s order management, institutional and professional traders can manage complex trades with ease. Staged orders allow for the complex to be simplified and managed with transparency. Large trading tickets can be broken down across trading strategies and liquidity venues – while management and reporting is simplified as the execution reports are aggregated into a single final trade ticket.
With 2022’s cryptocurrency market downturns creating multiple liquidity crises among exchanges that lack the cash or convertible assets to finance transactions, matters of liquidity have been a major cause for concern among traders.
In March 2023, liquidity for the Bitcoin-Tether pair on the leading crypto exchange Binance fell by 70% following the news that the platform was halting its zero-fee trading pairs with BTC.
Skarb can help to counter these issues in liquidity by equipping institutions with far greater choices ahead of actioning trades.
Lack of Regulatory Compliance
As a market that’s still developing, cryptocurrencies have heralded a series of new accounting and compliance challenges for institutional traders. Without standardized regulatory guidelines, it can be more difficult for institutions to undergo sufficient reporting and taxation requirements.
With concerns surrounding the risk of fraud, hacking, and money laundering within the cryptocurrency market, matters surrounding compliance are of the utmost importance to institutions.
The necessity of institutional and professional traders to access more holistic reporting is one that’s vital to the growth of the industry. Crucially, Skarb’s terminal excels in its suite of comprehensive order insights.
Here, Skarb brings positive change for its institutional users by equipping them with an Administrative Panel that provides post-trade information and a suite of data and analytics to bring more penetrative performance insights.
In addition to this more holistic view of trading performance, institutions can also effectively audit themselves within the analytics and position monitoring tools that Skarb offers throughout multiple exchanges. This helps to unite both education and data-driven insights for traders.
Because Skarb unifies trades throughout dozens of exchanges all within its terminal, core functions like the Order History feature can offer institutional traders the ability to analyze all of their orders, whether they were executed or canceled, for specified periods of time.
Managing Counterparty Risk
According to a recent Acuiti Crypto Derivatives Management Insight report, as much as 50% of surveyed participants were concerned about counterparty risk. This worry dwarfed the 31% that expressed concern over operational risk, the 13% that cited liquidity risk as a primary fear, and the 6% that were concerned over market risk.
Counterparty risk refers to the possibility that one of the parties involved in a transaction could fail to fulfill its side of the bargain, which has the potential to lead to significant losses for the other party.
In the sprawling cryptocurrency landscape, institutional trading hinges on the trust that counterparties will be capable of fulfilling their contractual obligations.
As FTX has shown in 2022, the trust that major cryptocurrency exchanges will have sufficient volumes of a given asset available when it’s time to trade or withdraw can lead to major problems for users.
The quickly evolving digital asset landscape is seeing several solutions to address counterparty risk. Custodial services for institutional investors continue to grow – while exchanges continue to grapple with how best to deal with the demands of institutional traders who don’t want to pre-fund their accounts. Skarb’s solution again acts as an all-in-one management tool – with connectivity to several exchanges and compatibility with several custodians traders can insure their buying power and assets are where they need them to be, when they need them to be there.
Overcoming the Challenges Facing Institutions
While there are certainly a number of barriers that are still impacting the efficiency of institutional trading in the cryptocurrency market, Skarb’s unique terminal has opened the door to a level of market accessibility that’s never before been seen within the ecosystem.
In terms of restoring trust, limiting instances of risk, and improving compliance, there may still be a long way to go. However, through the development of cutting-edge terminals like Skarb, these barriers are decreasing in size at a rapid pace.
