Institutionalization Of Cryptocurrencies: How Does It Work
Bitcoin and cryptocurrencies have come a long way since their inception in 2009. Once they were considered a niche asset, reserved for tech geeks. Today they are becoming a mainstream investment tool, coveted by many.
Retail investors that buy bitcoin with credit card can now use it as collateral and a source of cash flow using decentralized finance products. However, cryptocurrencies are not yet considered an institutional asset class. There’s still a lot of work before cryptocurrencies become the go-to asset for banks.
With that said, the trend is clearly picking up. In the past year, companies such as Tesla and MicroStrategy have invested more than $5 billion in bitcoin, opening the way to others.
But what will it take for cryptocurrencies to really become a trusted asset class for traditional financial institutions? In this article, we try to explore the different elements the industry needs for crypto to become a universally trusted asset.
Before we go further in our analysis of the institutionalization of cryptocurrencies, let’s talk about the elephant in the room – regulation.
Widely unpopular within the crypto community, regulating cryptocurrencies is a must if we want them to become trusted assets. The concerns are understandable, as the initial goal of crypto is to provide us a tool independent from banks and government institutions.
However, this is a utopist view on the matter, as there’s little chance that cryptocurrencies will replace traditional money in the near future. Consequently, they will be forced to coexist with the current financial ecosystem and allow us to improve it. Regulation of cryptocurrencies actually brings a wide array of benefits, which mostly outweigh its drawbacks. In fact, regulations might be the first step toward a safer and stable crypto industry.
Still, the challenges ahead are numerous. Different countries have different views on cryptocurrencies and their decentralized nature hinders the process of drawing out a global regulative framework.
For banks and government institutions to begin accepting cryptocurrencies as sound investment products, there needs to be a solid infrastructure behind them.
At the moment, there’s an overreliance on cryptocurrency exchanges and brokers for everything related to crypto. These platforms have a long history of hacks and malicious attacks that have left investors at a total loss of funds. To attract bigger investors, service providers are required to provide the highest levels of security and continuously invest in safety measure upgrades. Thanks to regulations, crypto service providers will be able to ensure user’s funds through government-backed insurance solutions such as the FDIC.
The increased security and regulative measures should lay down the groundwork for institutional investors to slowly start participating in the crypto industry. When big investors start participating in the ecosystem, trust from retail investors should increase. Simultaneously, the volatility of the cryptocurrency market should be significantly reduced thanks to the increased liquidity from institutional investors’ funds. As such, crypto prices shouldn’t crash suddenly on a single rumor.
The result is a more stable and less erratic market, that becomes a much more interesting and safer long-term investment.
Getting recognized as a financial sector on its own
Blockchain technology and smart contracts gave birth to decentralized finance. Today, individuals don’t have to rely on banks to access traditional financial products such as cash loans, lending, savings accounts, etc.
But the DeFi ecosystem is still in its nascent state, marred with scams and rug-pull schemes. Furthermore, compared to traditional financial products. DeFi is far from a beginner-friendly ecosystem. However, with increased regulations and improved infrastructure, DeFi could become a decent alternative to the traditional system. As trust in DeFi increases with institutional inventors, it could bring exponential growth and widespread recognition for the entire sector.
Increased adoption as a currency
Finally, an important factor for the institutionalization of cryptocurrencies is their increased usage as daily payment methods.
Until now, merchants were hesitant to adopt them, due to their high volatility. But in addition to regulations, there are other factors coming into play that will ultimately reduce the volatility of cryptocurrencies.
First, there’s the proliferation of stablecoins. These cryptocurrencies are usually pegged 1-to-1 with traditional currencies like the USD or EUR. They provide the advantages of blockchain tech without the volatility drawbacks. Next, there is the increased interest in cryptocurrencies from big payment processor companies such as Visa and PayPal.
And finally, there’s the widespread usage of payment gateways, which allow users to spend crypto while the receiver can choose between crypto or FIAT.
Cryptocurrencies have proven that they are here to stay. As highly appreciating assets over time, individuals are becoming increasingly interested in them as a long-term investment.
However, for crypto to become institutionalized, cryptocurrencies need a global regulative framework that will above all help classify them as a safe asset class. These regulations should, in turn, bring reduced volatility and increased trust from institutional investors.
And while there are multiple challenges ahead, we can safely assume that cryptocurrencies have already passed their “fad” status and are now considered solid investment tools.
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