With institutional interest in cryptocurrency on the rise, the asset management industry is stepping up to meet the needs of this growing market. From limited initial exposure to more differentiated strategies, large pension plans and hedge funds are stepping up their stakes in cryptocurrencies as the market becomes more mainstream.

With institutional demand for more actively managed cryptocurrency investments picking up steam, the asset management industry has begun to address the needs of this neglected space. The first signs of institutional interest were about getting initial exposure to Bitcoin and Ether, either directly or through passive products.

Now, the appetite is going beyond this initial exposure to differentiated strategies and an attempt to get more exposure to this growing asset class. Pensions, endowments and foundations have still been some of the slowest investors to adopt cryptocurrencies, according to a Fidelity survey of institutional investors in January 2022.

Large pension plans like the Houston Firefighters’ Relief and Retirement Fund, for example, have announced crypto allocations, but most are still small. The Houston fund’s 2021 allocation to investments in Bitcoin and Ether comprised only 0.5% of its $5.2-billion portfolio. Hedge funds, registered investment advisers and some companies step up their stakes in cryptocurrencies as the market becomes more mainstream. Institutional clients traded $1.14 trillion worth of cryptocurrencies on the Coinbase exchange in 2021, up from just $120 billion the year before and more than twice the $535 billion for retail.

I believe in blockchain technology. There’s going to be that revolution, so it has earned credibility. Bitcoin is like gold, though gold is the well established blue-chip alternative to fiat money

Ray Dalio, Former CEO of Bridgewater Associates | $140 Million

A survey of 300 institutional investors conducted by State Street in October 2021 found that more than 80% were now allowed to have exposure to cryptocurrencies. Large funds with assets of $500 billion or more under management were the most excited, and nearly two-thirds of them had dedicated staff for the crypto market. While the majority of crypto funds have a primary office location in the U.S., fewer than 20% are technically domiciled there (as a Delaware company, for example).

For a variety of tax, legal and regulatory reasons, the Cayman Islands and the British Virgin Islands are the predominant offshore legal domiciles for crypto funds. Together, these offshore locales are the domicile for 49% of crypto funds.

As more institutional investors gain exposure to cryptocurrencies, the asset management industry is poised for continued growth. With large funds with assets of $500 billion or more leading the charge, and offshore domiciles like the Cayman Islands and the British Virgin Islands becoming popular choices for crypto funds, the industry is evolving rapidly to meet the demand. As cryptocurrencies continue to gain credibility and mainstream acceptance, we can expect to see even greater institutional interest in the years ahead.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

The growth of the cryptocurrency market has been explosive in recent years, as more investors and institutional players have entered the fray. Crypto adoption rates continue to rise around the world, with Asia leading the way in terms of institutional interest. This growth has led to a wider range of products and services across the industry, leading to a positive feedback loop that has helped to drive adoption even further.

The crypto industry has been around for over a decade now and, like many other industries, started with speculative use cases focused on retail users, which goes hand-in-hand with high volatility. Institutional adoption is a direct result of more mature and institutional-grade products in the market, in turn leading to a positive feedback loop with growing institutional interest and products that stand the rigorous tests of compliance and scalability.

Pre-2017, crypto liquidity was limited to a handful of exchanges with a few million dollars in volume across all assets — this has dramatically changed in recent years. More liquidity venues with subsequent on-off ramps between fiat and crypto have been vital to crypto succeeding in institutional use cases.

Crypto Funds by Continent

According to Fidelity’s study, adoption rates in Asia are higher (71%) than in Europe and the United States. Fidelity found that 56% of Europeans and 33% of U.S. institutions now hold investments in digital assets, up from 45% and 27%, respectively. As of the end of Q4 2021, there were more than 860 crypto funds across the globe with primary offices in more than 80 countries, according to data from Crypto Fund Research.

The pace of new fund launches began to accelerate in the first quarter of 2021, and this trend continued during the rest of 2021 as new fund launches outpaced fund closures for six consecutive quarters. Just over half of all crypto funds are based in North America, most of which are in the United States. Europe and Asia are each home to around 20% of funds.

From limited liquidity and a small number of exchanges to more than 860 crypto funds in over 80 countries, the cryptocurrency market has come a long way in a short time. With institutional adoption rates on the rise and growing interest from investors around the world, the industry is poised for continued growth in the years ahead. As more mature and institutional-grade products enter the market, we can expect to see even greater adoption rates and increased interest from traditional financial institutions.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

The cryptocurrency market has seen its fair share of ups and downs, but for institutional investors and industry leaders like Fidelity and Galaxy Investment Partners, this is the perfect opportunity to double down on digital assets. From buying parts of cryptocurrency trusts to using derivatives to trade digital asset price developments, institutional demand for digital assets is on the rise.

Institutional demand for digital assets comes in the form of:

• Direct cryptocurrency purchases, such as MicroStrategy buying more than 129,000 BTC to date or Tesla’s $2 billion in BTC holdings.
• Purchasing parts of cryptocurrency trusts, like Grayscale’s Bitcoin Trust.
• Using derivatives like futures and options to trade digital asset price developments.
• Buying or selling NFTs like CryptoPunks.

The most vocal institutional holder of Bitcoin is the U.S. company MicroStrategy, whose CEO, Michael Saylor, purchased 129,218 BTC at an average price of $45,714.33.

I figure this is my third crypto winter. There’s been plenty of ups and downs but I see that as an opportunity… I was raised to be a contrarian thinker and so I have this knee jerk reaction: If you believe that the fundamentals of a long term case are really strong, when everybody else is dipping [out], that’s the time to double down and go extra hard into it.

Abigail Johnson, CEO of Fidelity | AUM $4.5 Billion

Latin American country El Salvador is another large institutional buyer of Bitcoin. President Nayib Bukele made Bitcoin a legal tender in September 2021, and the cryptocurrency has seen large success in terms of adoption.

The move to introduce a highly volatile asset as legal tender, which business owners have to accept, has drawn a lot of criticism, with some accusing Bukele of wasting taxpayers money Twitter recognition — after Bitcoin prices plunged in May 2022. We will see how his bet plays out.

What is going to happen is, one of these intrepid pension funds, somebody who is a market leader, is going to say, you know what? We’ve got custody, Goldman Sachs is involved, Bloomberg has an index I can track my performance against, and they’re going to buy. And all of the sudden, the second guy buys. The same FOMO [fear of missing out] that you saw in retail [will be] demonstrated by institutional investors.

Mike Novogratz, CEO of Galaxy Investment Partners | AUM $1.9 Billion

While many have been hesitant to enter the cryptocurrency market, Latin American country El Salvador has taken a bold step by making Bitcoin a legal tender, paving the way for adoption and legitimizing the digital currency. As institutional investors watch and wait, many believe that the market is poised for another boom. The future of digital assets is bright, and we look forward to seeing how this emerging market evolves.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

The world of cryptocurrency is constantly evolving, and so are investor attitudes towards it. According to a recent survey by Cointelegraph, nearly two-thirds of professional investors report holding crypto assets in their personal portfolios, marking a significant increase in the past two years.

Close to 2/3 of the professional investors say they hold crypto assets in their personal portfolios. This represents a staggering increase of 18% since the last Cointelegraph survey was done two years ago.

What type of investor is your company?

Several case study resopndents stated that they had privately invested in Bitcoin and other digital assets, while their institutions had not yet made any direct investments.

Are you personally invested into crypto assets?

However, the majority of respondents had a high level of decision-making ability within their firm. A possible explanation for this can be that asset allocators are investing with higher risk aversion when investing on the behalf of others than when investing their own wealth.

While such investors may be more inclined to take risks with their personal wealth, the survey also highlights the fact that institutional investors may approach cryptocurrency investments more cautiously, due to the responsibility they have for the assets of others. As the cryptocurrency market continues to mature, it will be interesting to see the evolving attitudes of investors towards this fascinating and often unpredictable asset class.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

There is not a single crypto custodian that scores highly on every dimension, and custodians exhibit different strengths. The right custodian depends very much on the needs of the client.

An Insider Insight with John Gu, CEO of AlphaLab Capital Group

The OGs (Example: BitGo)

This group consists of qualified custodians whose clients are also highly regulated institutions — e.g., Fidelity, Calpers. Their service offering reflects the conservative trading needs of their client base, and while they may be relatively expensive, they are the ideal choice if your primary goal is to minimize risk.

New Guard (Examples: Fireblocks, Copper)

The “second wave” of custodians has established a dominant position in an adjacent market to the OGs and differentiates itself by offering a broader range of services. As such, they are not primarily focused on minimizing risk. They attract clients — e.g., mid-sized hedge funds — with more complex trading requirements, for whom the trade-off between regulatory certainty and enhanced functionality makes sense.

Challengers/Upstarts/Wildcards (Example: Atato)

This group often originates from non-Western markets. They compete with the New Guard, aiming to offer a similar or improved breadth of service — e.g., Atato’s “Bring Your Own Chain” offering supports all assets, past, present, and future — with enhanced usability and a lower price. They represent an attractive choice for smaller funds or startups with complex needs, higher price sensitivity and a willingness to take a chance on a new player.

Specialists (Example: Finoa)

For investors who require deep expertise in a specific area — e.g., staking services — it may make sense to use a specialist custodian in lieu of or in addition to one of the generalists. In the future, one would expect the specialists to raise their performance across the other axes or for the generalists to raise their game to accommodate specialist needs. For now, a multi-custodian approach may be the best bet.

The above represents the current state of the market and not the end or ideal state. That said, we do not believe that winner-takes-all effects will prevail, leaving one or two dominant players as the main or only viable choice. The crypto investor market is uneven and calls for a range of players to fulfill various use cases. Knowing what you need is therefore key, and (for now at least) performing careful due diligence is paramount.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

As cryptocurrency continues to grow in popularity, larger organizations such as hedge funds and decentralized autonomous organizations (DAOs) have to deal with the reality of growing regulation, risk from hackers, and responsibility to their clients. One of the most important factors for these organizations is choosing the right custodian for their assets. However, with the sheer number of options available and the secrecy of the industry, finding the right custodian can be a daunting task.

While self-custody (“your keys = your crypto”) remains the ideal for cryptocurrency purists, larger organizations, such as hedge funds and Web3-native entities, such as decentralized autonomous organizations (DAOs) have to grapple with the reality of growing regulation (by governments), risk (from hackers) and responsibility (to their clients).

The custody landscape, like everything else, is an emerging field with a range of heterogeneous solutions. In addition to the sheer number of options available, the expected secrecy of the industry makes it difficult to find details unless you are able to ask very specific questions and know the range of the offerings at hand.

We’ve narrowed down the important factors for the potential custody user.

DeFi Connectivity

The sprawling world of DeFi, with its decentralized lenders, trading platforms and native tokens, such as stablecoins, is continuously evolving. The ability to connect and trade seamlessly within and between these protocols is vital for clients, for whom DeFi represents a core part of their strategy.

Staking/Yield Services

Putting your money to work by staking (on a validator node) or earning yield (via DeFi protocols) is an increasingly vital part of crypto investing. It also requires time and effort that could be spent elsewhere, and the ability of a custodian to take on this role represents a distinct advantage for the professional investor.

Supported Assets

History (especially recent history) has shown that there are no “safe” coins, so it is necessary to build a diversified portfolio, not only across tokens but also across chains. Ideally, a custodian should be able to support any asset you bring, but in reality, the ability to add new coins can be constrained in the case of older technology.

Pricing Competitiveness

The traditional pricing structure is to charge based on asset value (assets under custody) and the number of transactions. New providers are increasingly innovating on pricing models, including offering fixed fee subscriptions, tiered by service level, which can mean significant savings in comparison to asset or activitybased fees (which are not capped). Thus, pricing structure (basis points or $) is often more important than price level (25 bps vs. 35 bps).

Security

The most basic and most important service of a custodian is to keep assets safe. There are multiple methods that custodians use to keep your keys secure (MPC, HSM) and various ways in which they can demonstrate the efficacy of these systems (such as audits). Systems ultimately demonstrate their security when they manage to scale without being successfully hacked or experiencing a major code failure. But ultimately, a history of no major hacks or code failures is the truest testament to a system’s security.

Insurance

Since no security system is invulnerable and human beings are fallible, insurance is the last line of defense and should, in theory, provide users with ultimate peace of mind. The reality of crypto custody insurance is often patchy, so even if a custodian claims to be insured, it is important to pay attention to the level and terms of coverage, ideally with an expert trained to read the fine print.

Choosing the right custodian for cryptocurrency assets is crucial for larger organizations dealing with growing regulation, risk, and responsibility. Factors such as DeFi connectivity, staking/yield services, supported assets, pricing competitiveness, security, and insurance are important considerations when choosing a custodian. By carefully considering these factors, organizations can ensure that their cryptocurrency assets are safe and secure.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

Market makers have played a vital role in financial markets, and their importance has only increased in the cryptocurrency space. With growing demand for Bitcoin and Ethereum trackers, market makers have been providing liquidity and reducing spreads, volatility, and enabling fair price discovery. Additionally, they can support the growth of the ecosystem by adding value beyond market making.

Insider Insight with Michael Lie, Head of Digital Asset Trading at Flow Traders

Back in 2017, we saw a growing demand in Bitcoin and Ethereum trackers. As global liquidity provider specialized in ETPs, it was a natural move for us to provide liquidity in products that were tracking cryptocurrencies. We soon started making markets in cryptocurrency spot, futures and ETPs. We were able to leverage our technology stack and trading experience to start trading this new asset class. As the market developed, we started trading options, we became active on decentralized finance protocols, and we also created an OTC business.

What is a role of a market maker in crypto?

Market makers have always been very important for financial markets. It reduces spreads, it reduces volatility and also leads to fair price discovery of the quoted products. Even more so for crypto, where the ability to invest in a project at a fair price can play an important role for the success of a project. Especially for projects where a well-diversified and decentralized distribution of tokens is key, a good market maker will have a big impact.

As we started market making cryptocurrencies, it became apparent that we can add value beyond market making. We support ventures and the growth of the ecosystem with our experience in traditional finance and our capital, which is why we launched our venture fund Flow Traders Capital this year.

How do you view institutional adoption?

For institutional adoption of cryptocurrencies, the two most important factors are the market infrastructure and the state of regulation. Over the last years, a lot has improved on the infrastructure, such as the exchanges where you can trade cryptocurrencies and the custody solutions that are being used. As for the regulation, it’s not fully there yet, but implementation of regulations like MiCA will enable institutions to start adopting cryptocurrencies.

An example of a regulated product that has enabled institutional adaption of cryptocurrencies are crypto ETPs. These are products that are traded on exchanges and track the price of cryptocurrencies. At the same time, these products are regulated and enable institution to gain cryptocurrency exposure, without having to deal with on which exchange they are going to buy the cryptocurrencies and what custody solution they are going to use.

Institutional adoption of cryptocurrencies depends on market infrastructure and regulation. Although much has improved in infrastructure, such as exchanges and custody solutions, regulation is still evolving. The implementation of regulations like MiCA is expected to enable institutions to start adopting cryptocurrencies. Regulated products like crypto ETPs have already enabled institutional adoption by allowing them to gain cryptocurrency exposure without dealing with exchanges and custody solutions. The role of market makers remains crucial in the success of projects with a well-diversified and decentralized distribution of tokens.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

Options are an important tool for investors to manage volatility risks, and the cryptocurrency market is no exception. While the volume of options traded is still lower compared to futures, there is still significant potential for growth, as shown by the ongoing downtrend in at-the-money implied volatility for both Bitcoin and Ether. This could indicate that the market is maturing and attracting more institutional participation.

Options are one of the most important instruments for investors to hedge against unexpected volatility. Just as with futures, there are some options on digital assets that are issued by traditional institutions and others by cryptocurrency exchanges. Of those, Deribit is by far the most important. More than 95% of all cryptocurrency option trading activity happens on this exchange. The monthly volume of options transactions was between $10 billion and $20 billion for Bitcoin and between $5 billion and $15 billion for Ether-denominated options in 2022.

As you can see, the volume of options traded is about two orders of magnitude lower than that of futures. In traditional financial markets, the ratio of futures volume to option svolume is around 3.9.29 This indicates that derivatives options have a long way to go and represent the vast potential for growth.

An interesting picture emerges if we look at at-themoney implied volatility. This is a representation of future volatility that traders expect. We can see a slow but steady downtrend in ATM implied volatility for both Bitcoin and Ether. A notable exception is the peak in May 2022 following the demise of LUNA.

This ongoing downtrend is the hallmark of maturing markets and better hedging, which could be indicative of more institutional participation.

Bitcoin ATM Implied Volatility

If we reconsider the chart overlaying Form 13F filings with Bitcoin’s price, we can see that institutional interest is driven by price. When Bitcoin outperforms all other asset classes, even institutions are willing to look past the regulatory uncertainty and volatility and want to get in. But digital asset prices have been mostly sideways or negative YoY.

The cryptocurrency options market has significant potential for growth, as shown by the increasing institutional interest and ongoing downtrend in implied volatility. While the volume of options traded is still lower compared to futures, this could change as the market continues to mature and attract more investors. As such, it will be interesting to see how this market develops in the coming years and what opportunities it presents for investors looking to manage their risks.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.

Digital asset futures have become increasingly popular among professional traders due to their liquidity and market sentiment indicators. Perpetual swaps, which are never settled, dominate the digital asset futures market. Open interest, a measure of active futures positions, has increased significantly over the past year, particularly during bullish periods.

Digital asset futures are almost exclusively perpetual swaps (mostly called perpetuals or just “perps”), which means they are never settled.

Open interest is a great measure of future liquidity. Open interest measures the value of active futures positions held. It increases when more contracts are opened than closed on a specific day. Looking at the development of open interest shows peaks during bull markets in the spring and winter of 2021. The overall level has increased by about 30% in 2022 compared to last year and by more than five times from 2021 to the year before.

Open Interest of Bitcoin Futures

Comparing the liquidity of futures to the spot market reveals why derivatives are so attractive to professional traders. Spot markets offer a fifth to an eighth of the liquidity of derivatives markets for Bitcoin and a quarter to a fifth for Ether.

The volume of traded Bitcoin futures is between $1.5 trillion–$2 trillion worth in any given month, about slightly less than half of that for Ether. Compared to the traditional futures market, where a multiple of this is traded every day, it is a small change.

Bitcoin Spot to Futures Volume

Another important metric to consider is funding rates. Perpetual funding rates indicate the market sentiment. Put simply, positive funding rates mean long traders pay short traders so that the price of the perpetual aligns with the spot price. If funding rates are consistently positive, markets are bullish. Consistently negative funding rates are found in bear markets. Both Bitcoin and Ether funding rates have been hovering around 0%, which aligns perfectly with the slowdown in institutional interest from Form 13F filings and inflows into digital asset funds.

As the digital asset market continues to evolve, perpetual futures are becoming an important tool for professional traders seeking liquidity and market sentiment indicators. While Bitcoin and Ether dominate the digital asset futures market, other cryptocurrencies such as Ethereum Classic, SOL, XRP, Tether, and BNB are also gaining traction. As the industry continues to grow, it will be interesting to see how digital asset futures evolve and what new metrics and indicators traders will use to inform their strategies.

This article is an extract from the 70+ page Institutional Demand for Cryptocurrencies Survey co-published by the Crypto Research Report and Cointelegraph Consulting, written by multiple authors and supported by Flow Trader, sFox, Zeltner & Co., xGo, veve, LCX, Finoa, Lisk, Shyft, Bequant, Phemex, GMI.