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Curatia Analysis for Mon, Apr 15

The Two-Sided Crypto Coin (1 of 2): Rejuvenation

After trading between $3,300 and $4,200 for the duration of Q1, bitcoin has surged above $5,100 in the first half of April, gaining 52% since February 6.

The surge underlines a rejuvenation for cryptocurrencies as some market participants call for regulation to shore up the industry’s credibility, mainstream financial firms advance plans to build out crypto infrastructure, and institutions begin testing the crypto investing waters.

Establishing Credibility

Bitcoin’s rebound has touched off speculation that the cryptocurrency may have finally found a bottom after a 2018 from hell. But if crypto is to sustain its resurgence, the industry will need to win the trust of institutional investors.

In pursuit of that lofty aim, some crypto players have emerged as key advocates of regulation and professionalization. The Winklevii have long championed better oversight and compliance in the crypto sector, going so far as to launch their own self-regulatory organization.

One silver lining of crypto’s 2018 nosedive may be other crypto firms’ increased receptivity to that message. Coinbase and London-based Lendingblock are among the firms who’ve recently poached senior compliance executives from Wall Street — part of a growing crypto trend that’s seen a 230% increase in demand for compliance roles among crypto firms.

Crypto exchanges are also tapping financial brand names for market surveillance services. Following Gemini’s engagement of Nasdaq’s Smarts market surveillance software last year, Goldman Sachs-backed Circle struck up a partnership with Nice Actimize in early March.

Established Credibility

Mainstream financial firms are likewise continuing their push to create the necessary plumbing for trustworthy crypto services. In February, JPMorgan introduced a “stablecoin” pegged to the US dollar to facilitate instantaneous settlement of transactions while smothering crypto’s notorious volatility.

Deutsche Börse meanwhile announced in March plans to “build a fully integrated digital asset ecosystem including issuance, custody, access to liquidity, and banking services,” following in the footsteps of of Swiss exchange SIX and NYSE parent ICE. On the buy side, Fidelity is soft-launching its crypto custody business with a five-firm pilot.

Institutional Interest

But perhaps the most convincing evidence of crypto’s revival lies in the continued interest of institutional investors, who are increasingly testing the waters.

Harvard’s university endowment reportedly opted to back crypto-company Blockstack, which is holding a $50M digital-token offering. The move follows investments by Yale, the University of Michigan, and two Virginia pension funds in crypto and blockchain concerns in the last six months.

Those forays, while eye-opening, were carefully choreographed to favor investments in crypto- and blockchain-related companies, with the funds concerned generally permitted to invest just a small proportion of assets in cryptocurrencies themselves. Financial media has portrayed such investments as outliers among pension funds and endowments.

That may be changing. Global Custodian survey revealed Thursday that 94% of 150 endowments have invested in crypto-related initiatives in the last 12 months.

Such investments have occurred despite concerns over a “lack of robust market infrastructure, volatility, and regulatory concerns, followed by lack of liquidity.” Only 7% of firms said they plan to decrease their allocations to crypto-related investments in the next year.

What’s more, the activity appears to be accelerating. Since April 1, CME’s bitcoin futures volume has skyrocketed 950%.

Moreover, institutional investors have grown more savvy in navigating the harrowingly opaque world of cryptocurrencies amid reports of faked volumes and market manipulation. They’ve narrowed their sources of market data to reliable providers Coin Metrics and Digital Assets Data as well as startups Skew, Tagomi, CryptoCompare, Nomics, Kaiko, and IPC Systems.

That seemingly innocuous step may offer the clearest indicator yet of a crypto comeback, because it illustrates institutional investors’ desire to participate in crypto markets despite their many pitfalls — as long as they have a roadmap for avoiding them.