Institutional investors have a huge appetite for cryptocurrency according to a report released this month by Morgan Stanley. The total cryptocurrency assets under management (AUM) increased by $1.25 billion between January and July 2018 while the share of institutional investment compared to total market capitalization rose from 1 percent in January 2018 to 2.8% this July. This is despite the fact that cryptocurrency prices have been falling since January.
The report agrees with the existing sentiment that the cryptocurrency space is attracting huge institutional investment, saying that there have been substantial "institutional inflows" since January this year, but also details a number of points about the challenges of cryptocurrency and blockchain that could be preventing further adoption and investments.
Stanley report says that institutions could have invested more than $10 billion at cryptocurrency assets in recent years and that $5.9 billion actually entered this market via the pockets of Wall Street bigwigs. This sum is equivalent to the is comparable to 237 days of block rewards issued by the “largest coins,” which was around $24.8 million per day as of July 1st.
The current amount of money that constitutes institutional investments is around $7 billion dollars, which is however still small compared to the collective market capitalization of all cryptocurrencies. It only makes up 2.8% of that capitalization. Additionally, this amount has declined since January 2017's tally of 3.8 percent of institutional investments share of the total market capitalization for all cryptocurrency.
Generally, for the last 18 months, retail investments have exceeded institutional investments. However, according to the report, retail investments in cryptocurrencies have been falling since January. Despite the reported increasing entry of institutional money, however, the market has remained quiet, indicating that institutions could be only buying enough cryptocurrency to keep the market afloat since retail interest has decreased to its lowest.
The fact that market prices have remained depressed for last 11 months amidst increased entry by institutions, may also indicate mirror the fact that most institutional clients do not buy through the normal traditional order book platforms but via OTC trading. This fact was also mentioned by the global head of trading at Cumberland Bobby Cho who said that hedge funds continued to issue a multitude of over-the-counter Bitcoin transactions, which are often over $100,000 per transaction.
Volatility down, more fiat options, more volumes, and more raised through ICOs
The report, which is titled “Update: Bitcoin, Cryptocurrencies and Blockchain” and is an update to the first version named “Bitcoin Decrypted: A Brief Teach-in and Implications,” also touches on a number of other issues including the correlation between cryptocurrency prices and trading volumes. According to the report, 52 percent of Bitcoins are now being traded against cryptocurrency pairs and 48 percent against fiat. The trading volume against different fiat pairs is also different.
While the majority of BTC traded against the dollar by more than 80 percent in 2013, more options are becoming popped up and become more popular. For instance, volumes for BTC against JPY increased to between 50 percent and above 70 percent between February 2016 and April 2018, and the dollar to Yen pair volumes passing the 30 percent mark between May and December last year.
But prices have been more stable than any other year this year. Stanley says that price stability comes when the market is waiting for the next technological innovation that or development that increases adoption of underlying asset or derivative.
Further, the report says that ICOs have raised a larger amount of money in 2018 ($9.39 billion) so far than in 2017 ($5.85). However, approximately 32% of ICOs failed after raising $1.3bn in 2017 while around $1.62 billion raised through ICOs this year is defunct. However, according to the report, the best months for those raising the ICO were February this year which saw more than 2.5 billion raised, January which also saw around that figure raised, and March and May which both saw around 2 billion dollars raised in ICOs in total.
December last year saw around 1.6 billion raised in ICOs, turning out to be the best month in the year. Stanley report says that 64 percent of ICOs failed before or after raising money in the initial coin offering. Thus the figure is very high compared to 25 percent expected to fail after their first year in business.
Stablecoins and security tokens
It also talks about a popular topic of stablecoins adding that not all will survive but those with "the lowest transaction costs, highest liquidity and defined regulatory structure" will increase adoption. Stable coins are considered an important link between fiat and cryptocurrency and for storing digital assets without the value depreciating since they have near-constant value pegged to dollar, yen or other currencies with more predictable value.
The firm says that the next development in cryptocurrency space will be the creation of security token offerings or regulated ICOs. With regard to developments in payments with cryptocurrencies, the report says that cryptocurrency may be facing stiffer competition from other payment providers who are also prioritizing financial inclusion among the world's most poor. For instance, the report says that a QR-based payment scheme in India is reaching under-banked populations of India in a much less expensive way compared to Bitcoin.