Institutional Crypto Investments Dropped 95% to $433 Million in 2022

Mr. de Martino added that many cryptocurrency institutional investors participants have moved their business offshore “not because they wanted to not be in compliance with regulations, but because there was no way to be compliant in the United States.” Mr. de Martino said he supports that bill, and “market participants tend to agree that the CFTC has taken a more nuanced and knowledgeable approach to this space than the SEC.” SEC Chairman Gary Gensler has previously said crypto legislation should focus on regulating stablecoins and giving more authority to the CFTC to regulate digital commodities. Kari Larsen, New York-based partner at Willkie Farr & Gallagher LLP and co-head of its digital works practice, said that 2023 will continue to bring “robust enforcement action,” as well as more movement toward legislation. While the crisis was a “stress test for many people in the industry,” he said it will ultimately “wash out weaker players … and leave those remaining in a much stronger position.” As the crypto world grapples with recent events, those on Capitol Hill still haven’t reached a consensus on how to regulate the industry.

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• The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice.
• Over this period, the liquidity of cryptocurrencies significantly increased as many new players entered the markets, and new exchanges, instruments, and service providers to support digital asset investing have continued to mature.
• Support at the required scale, systems ranging from Trading and Risk to Treasury and Accounting will each need to be “crypto enabled” – whether extending decimal precision, messaging into new trading venues, or supporting new concepts like hard forks or airdrops.
• A survey of institutional investors suggests that their cryptocurrency allocations have increased over the last year despite the industry going through a prolonged crypto winter.

Despite the volatility, we saw an increase in the assets deployed in MMI and the number of signed organisations. As we gear up for the new year, we reflected on what we accomplished last year, and where we will go from here. In June 2021, Microstrategy added more Bitcoin to their balance sheet, bringing their total to over 105,000 Bitcoin. CEO Michael Saylor recognized the role of Ethereum in the disruption of traditional finance.

Institutional investors opt for crypto funds and derivatives

The Central Bank of Brazil has confirmed that the institution will run a pilot test regarding the implementation of its proposed central bank digital currency , the digital real. Our results reveal very little co-movement between member currencies of both regions and imply that regional proximity does not necessarily translate into exchange rate connectedness. Arcane Research notes that these results could be skewed towards an overrepresentation of positive crypto bias, as Fidelity clients have been generally more exposed to research and commentary related to the sector, due to Fidelity’s positive presence in the space. Crypto ownership and use are only legally restricted in 3% of countries worldwide and fully illegal in another 3%. According to Finbold, the countries with the highest prevalence of crypto ownership among internet users are Thailand, Nigeria, the Philippines, South Africa, and Turkey, each with between 18% and 20% of their internet users owning cryptocurrency. Other crypto ownership estimates, such as the one by Statista demonstrate steady growth in the four years from 2019 to 2022.

Using both Twitter posts and Google trends to proxy investor attention, Philippas et al. indicate that attention is partially effective on cryptocurrency prices, especially for periods with higher uncertainty. Examining the 23 largest coins through 25 million tweets, Al Guindy provides evidence for the causal relationship between investor attention and future price volatility. As with all emerging technology, familiarity will pave the way to increased adoption. Businesses will enter the world of DeFi by trading Bitcoin futures, buying digital assets, and holding these assets on the balance sheet. As they familiarize themselves with the latter, and once proper infrastructure has been deployed to meet institutional requirements for security, operations, and compliance—we expect institutional investors to delve deeper into experimentation with DeFi.

Is idiosyncratic volatility priced in cryptocurrency markets?

Apart from acquiring shares of actively and passively managed funds, institutional investors get involved in the crypto derivatives market thanks to high liquidity. Spot markets offer a fifth to an eighth of ETH the liquidity of derivatives markets for Bitcoin and a quarter to a fifth for Ether. Professional investors seem to be more interested in the latter asset, as its options open interest ($5 billion) recently surpassed that of Bitcoin’s ($4.8 billion). The representative sample of the Coinbase survey consisted of 140 institutional investors based in the United States who collectively have assets under management totaling around $2.6 trillion. The survey was conducted by business-to-business publisher Institutional Investor’s Custom Research Lab.

For long-cryptocurrency institutional investors equity funds, their engagement in Bitcoin and crypto has also often been via an extension of strategies such as factor-based investing, tail-risk hedging/asymmetric bets, or stock-picking. In addition to the volatility, the crypto sector’s lack of a proper regulatory framework is preventing financial institutions from significantly increasing their position within it. This lack of regulation causes uncertainty in the longer strategies that funds can adopt or the types of cryptocurrencies they can invest in. Regulations in the sector could create stability by reducing speculation, which is partly responsible for the high volatility. Furthermore, regulations can increase investor confidence in the sector, as protection schemes and coverage can be introduced to make trades and investments safer and bring the sector under the oversight of regulatory bodies. And DeFi by private equity, venture capital and institutional investors exploded in 2021, increasing nearly five times over the previous year’s total to $13.65 billion.

The causal relationship between Bitcoin attention and Bitcoin returns: Evidence from the copula-based granger causality test

For example, employing Wikipedia daily views as the investor attention measure, Kristoufek finds evidence for the relationship between attention and Bitcoin prices with the distinction of positive and negative news. Urquhart uses Google trends search queries3 and reports that investor attention does not have the predictive power to explain Bitcoin returns, volume and realized volatility. Using the same measure, Dastgir et al. point out a bi-directional causal relationship between investor attention and Bitcoin returns. Shen et al. suggest that tweets data from Twitter is a better measure of investor attention since it reflects more informed trader information, and they indicate that the number of tweets is a significant indicator of realized volatility and trading volume, but not returns.

Besides, we perform two-step regression approach (Kim et al., 2020, Feng et al., 2021) to explore a potential channel, which links investor attention and idiosyncratic volatility. The results show that higher liquidity levels arising from either retail or institutional investor attention lower down the idiosyncratic risk in the cryptocurrency market, emphasizing the substantial effect of liquidity. Finally, we search potential cross-sectional variability of investor attentions in terms of coin-level characteristics and market conditions.

Measuring the role of consuming natural resource domination and social media for green economic recovery

As part of their compensation, certain CoinDesk employees, including editorial employees, may receive exposure to DCG equity in the form of stock appreciation rights, which vest over a multi-year period. The survey, commissioned by Nickel and conducted by market research company Pureprofile this month, interviewed 200 institutional investors and wealth managers across the U.S., U.K., Germany, Singapore, Switzerland, UAE, and Brazil. For quant/HFT funds, the opportunity is to extend their existing market-making and statistical arbitrage processes into markets that now have meaningful volumes but remain much more inefficient and offer much higher spreads than traditional assets.

Coinshares says it has a potential reason for why institutional investors rushed to short-BTC products last week. Regarding the price of bitcoin, the asset manager described, “The study found high levels of confidence about the long-term trend of the cryptocurrency,” adding that 23% forecasted that BTC will exceed $30,000 by the end of 2023. Popular outlets such as bitcointreasuries.net estimate the total number of Bitcoins held by public companies, private companies, governments, and other funds to be around 1.39 million BTC. Given the total number of Bitcoins mined, this would amount to a share of roughly 7.2%. Naturally, this is a rough estimate as there may be more Bitcoins in certain wallets belonging to institutional holders. Given that the numbers only refer to Bitcoin, holdings for the entire crypto sector might look differently.

Cryptocurrency sector is attracting institutional investments

While cryptocurrencies have been in a drawdown of late, these declines are coming after huge rallies; Bitcoin and Ether remain 4 times and 10 times respectively more valuable than they were just 18 months ago. These run-ups took place during a time of unprecedented liquidity, as trillions of dollars of central banks’ money printing made its way to households via fiscal policies. Over this period, the liquidity of cryptocurrencies significantly increased as many new players entered the markets, and new exchanges, instruments, and service providers to support digital asset investing have continued to mature. Although these remain small markets relative to the most liquid markets in the world, we believe crypto markets are now large enough to allow for positions in sizes relevant to institutional investors. Several key differences exist between retail and institutional investment in the digital asset sector.

• The constraining impact of institutional investor attention on idiosyncratic volatility is in line with the findings of Yao et al. .
• John Delaney, senior director of investments and a portfolio manager at Willis Towers Watson PLC in Philadelphia, noted in an email that “asset owners are generally in the ‘asking questions’ state of their investment process as it relates to crypto investments.”
• Although there exists an extensive literature on the volatility of the cryptocurrency market (Katsiampa, 2017, Urquhart, 2017, Baur and Dimpfl, 2018, Yi et al., 2018, Katsiampa, 2019, Sabah, 2020), research regarding the role of idiosyncratic volatility is quite scarce.
• In its latest Digital Asset Fund Flows Weekly Report, CoinSharesfindsthat institutional digital asset investment products suffered minor outflows last week, contrasted by major inflows into short investment products.
• The volatility of natural resource pricing has become more important since natural resource prices and media economy play a critical role in economic development, which is comparatively understudied.

At the tip of the spear, a growing and meaningful share of less-constrained institutional investors, such as family offices, have already begun to allocate a small portion of their assets to outright crypto exposure. As shown below, well over half of high-net-worth investors in Europe and Asia have access to digital assets, directly or through financial advisors. Additionally, about half of US family offices and about 30% of family offices in Europe and Asia already hold digital assets.

Liquidity risks turned out to be the strongest obstacle to crypto adoption as 51% of respondents marked them as highly important. The more volatile the asset, the less conservative investors want to hold it on a balance sheet. In spring 2021, Tesla sold off some of its Bitcoin holdings to demonstrate to shareholders the liquidity the asset had. This went a long way in showing not only Tesla shareholders — but the rest of the equity markets as well — that holding digital assets, such as Bitcoin, could have its advantages.

PWC https://www.beaxy.com/s 47% of traditional hedge fund managers, representing $180B of AUM, are looking at investing in crypto. An Intertrust survey found hedge funds are expected to hold 7% of their assets, equating to $312B, in cryptocurrency in 5 years. Investment firms will no doubt lead the adoption of DeFi, however for these and other larger and more regulated institutions to cross the chasm, the required DeFI infrastructure will have to be built. We further analyze the relationship between investor attention and idiosyncratic volatility. Employing a similar panel regression model, we report a significantly positive relation between retail investor attention and future idiosyncratic risk for the univariate and all multivariate regressions.