There’s no denying that this has been a rough year for cryptocurrency investors, especially those who entered the market during the bull market of 2017. A drop in market cap from $800 billion USD to only $200 million was enough to shake many people’s faith. But as we’ve explained on this blog before, booms and busts are a normal part of crypto’s evolution, but this crash was of such enormity that some folks are convinced that the crypto market will never fully rebound.
But unbeknownst to most of the public, there are things developing behind the scenes that suggest the game is far from over. Today we’re going to explore the role that institutional investment will play in the recovery of the crypto marketplace, how it could fundamentally change the nature of cryptocurrency investing, and potentially take the market to new heights.
2018: Why this year is so significant for cryptocurrency
Years from now when the history of this era is written, fintech writers and investors will conclude that the biggest story of 2018 was not the crash, but the entry of institutional investors into the cryptocurrency world.
It is easy to forget that the incredible growth we saw in the overall market cap in 2017 was all just due to ordinary people. Investment banks may have been offering commentary on the sidelines, but they were not participating.
Back in 2017 when Bitcoin saw 20x growth (and altcoins saw much greater growth), financial institutions were a little taken off guard, but were intrigued nonetheless. That kind of growth in any asset class would be extraordinary, but cryptocurrencies represented a unique challenge for them. None of the major financial institutions had a complete understanding of how they worked, and even if they did, the sheer pace of growth spooked them into holding off out of fear that the bubble would burst.
That was then, this is now; in the months since the massive correction began, 2 things have been happening at once:
First, institutional investors have been educating themselves about how cryptocurrencies and blockchain technology works. They’ve learned which projects are legitimate, and which ones have no chance in hell.
Second, jurisdictions around the world are beginning to clarify where exactly they stand with cryptocurrencies.
This second one was probably the biggest obstacle to institutional investment: some investors did understand the technology, but none of them understood what the laws regarding this type of investment were. The lack of regulatory clarity led to a general ambiguity regarding the entire asset class.
Investors were afraid that if they invested huge amounts into crypto assets, they might be unwittingly violating some regulation or law they did not know existed, or that an older set of rules might be retroactively applied to these new assets and investors would be punished after the fact.
But this year, government attitudes toward cryptocurrency have begun to change. Rather than taking a hostile stance toward them, many governments around the world seem to be competing to attract both cryptocurrency developers and investors alike. Some locales such as Malta or Puerto Rico have changed regulations and tax laws to attract crypto investors with great success.
This new reality allows crypto-savvy investors to go jurisdiction shopping and chose the regulatory environments that best align with their goals. In such a situation, countries which don’t make things easy for investors will get left behind. It’s likely that this competition will ultimately lead to global investment environment that is much friendlier for crypto investors — and that’s exactly what financial institutions need to feel comfortable enough to start pumping untold billions into the market.
What will this look like exactly? We may not have to wait much longer to find out.
Next month, we will see the launch of Bakkt, a new federally regulated digital asset market aimed at institutional investors. This joint venture between Microsoft, Starbucks and the Intercontinental Exchange or “ICE” (owner of the New York Stock Exchange) will ultimately become a global marketplace that will allow financial institutions to buy, sell and store digital assets in safe and regulated way. In this way, they will not have to worry about unintentionally breaking the law.
Once these investors have that kind of insurance, it’s game on: these are institutions with HUNDREDS OF BILLIONS to invest, and when that happens, BTC will surge, and high-quality altcoins are sure to follow.
According to Mike Novogratz, one of the leading crypto proponents in the financial world and CEO of crypto hedge fund Galaxy Digital, this is what will serve as a ““scalable on-ramp for [for crypto markets] aimed at merchants, institutions [and] merchants”. (source)
What does all this mean for ordinary folks? It means that if you get in before this happens, you’re almost certain to see some serious gains. It may not happen immediately, but the groundwork is being put in place as you’re reading this right now.
For those with the means and the long-term belief in cryptocurrency, this is a buyer’s market. But what if you need cash now, buy don’t want to sell and miss out when institutional money starts flooding into the market?
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