From Retail to Institutional: The Shift in Crypto Investment

The cryptocurrency & digital asset sector has long been dominated by retail investors. However, with more and more institutions entering the market, the industry inches toward full adoption. With the buildout of tools that enable visibility and compliance, the institutional investment landscape for digital assets can reach new heights. 

During the 2017 bull run, specialty funds cracked open the institutional doors into cryptocurrency investing. This move grew over the years by emulating the lead of retail investors into the sector. The industry, however, has long awaited the mass arrival of established institutional investors and LPs (mutual funds, hedge funds, insurance companies, and sovereign wealth funds to name a few). Given these types of institutions comprise over 85% of the trading volume in US stocks, the entry of these entities is expected to escalate cryptocurrency market capitalization significantly. However, this influx of institutional capital brings the necessity of new infrastructure. In other words - products built to bridge the gap between traditional finance products and digital assets.

Institutional vs Retail Investment

Several key differences exist between retail and institutional investment in the digital asset sector. The most notable difference is investment size, as institutional investment managers allocate much larger sums compared to retail investors. Additionally, institutional investors employ more advanced analytics-driven strategies and pay more attention to risk. Institutions also have to adhere to strict governance and compliance rules, which can impact the way they handle digital assets. For example, they may not actually hold the assets, as their clients are the owners.

Cryptocurrencies and digital assets have introduced new accounting and compliance challenges for institutions and enterprises. The lack of established regulatory guidelines force these organizations to navigate complex reporting requirements and tax implications. The decentralized and anonymous nature of cryptocurrencies creates difficulties in tracking transactions and auditing records. Furthermore, the risk of fraud, hacking and money laundering associated with the crypto market exacerbates these challenges, requiring institutions to implement robust security measures and conduct thorough due diligence on counterparties. Despite these challenges, many institutions and enterprises are still exploring the potential benefits and opportunities presented by cryptocurrencies and digital assets – and are actively working towards finding solutions to these compliance and accounting hurdles.

Barriers to Institutional Investment

Despite the growing interest in the crypto sector, there are still several factors holding back institutional investment. These include a lack of market liquidity, concerns about market manipulation, and a lack of regulatory clarity. 

Though the market cap of Bitcoin hit $1 trillion in 2021, this is a fraction of the global equities market's cap of $250 trillion and the bond market. Additionally, issues concerning market manipulation and unethical practices like wash trading have deterred institutions from investing in crypto. Not least of all concerns, the regulatory uncertainty has made it difficult for institutions to comply with know-your-customer (KYC) and anti-money laundering (AML) regulations, as the nature of most blockchains can make it challenging to identify the other party in a trade.

However, the landscape of institutional investment in digital assets is evolving rapidly, and these challenges are being addressed as the industry matures. The ecosystem required to support institutional-grade investments is emerging, and regulations are also evolving to keep up with the changes.

Building the Infrastructure for Institutional Adoption

The Ledgible digital asset tax and accounting platform is a comprehensive solution for institutions and enterprises looking to navigate the complex world of digital asset investing, compliance, and management. SOC 1 & 2 Type 2 certified, the Ledgible platform provides a high level of security and trust.  

Cryptocurrencies present several challenges for traditional financial services firms: non-standard naming conventions, 24/7 trading, increasingly complicated transaction types, fragmented liquidity, and variable revenue streams to name a few. Without the proper tools, institutional crypto adoption may feel a little like fitting a square peg into a round hole. 

To 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. In addition, those systems will need to connect with the fragmented and constantly evolving world of digital asset liquidity. Only by solving both can traditional financial firms support digital assets using existing technology and operational teams.

To help turn this concept into reality, Ledgible has partnered with industry leaders in the Tradfi space, to form a normalized source of post-trade data to capture all that is necessary to properly account for digital assets no matter where a firm chooses to trade. By using this new source of data for digital assets, firms can easily connect the wide array of centralized exchanges, liquidity providers, Defi protocols, blockchains and custodians in the crypto space into the many downstream accounting and risk platforms that need to consume such information.

The platform bridges the gap between traditional financial (TradFi) and digital assets, offering a seamless integration of the two. With its cutting-edge technology and focus on compliance, Ledgible is the ideal partner for institutions and enterprises looking to invest, manage and stay compliant with their digital assets.

This post was authored by an external contributor and does not represent Benzinga's opinions and has not been edited for content. This content contains sponsored advertising content and is for informational purposes only and not intended to be investing advice.