Coinbase — the second largest company in the cryptocurrency market behind $12 billion giant, Bitmain — is working with third-party custodians and hedge funds to bring institutional investors into the cryptocurrency market.
In the past few months, prominent hedge fund managers and investors have indicated that institutional investors are waiting on the sidelines — struggling to enter the cryptocurrency market due to the distinct lack of custodian solutions.
Ari Paul, the co-founder of Blocktower — a cryptocurrency-focused hedge fund founded by former Goldman Sachs executives — noted that it has been difficult for institutional investors, such as large-scale pensions, hedge funds, and academic institutions, to commit to the cryptocurrency market without stable and robust custodian solutions in place.
Paul summarized this by saying:
“Institutional money started trickling into cryptocurrency in mid 2017, but it’s been slower than many (including myself) expected. That doesn’t mean it’s not coming. There are a lot of pieces that need to come together, one big piece being third party custody. Custody isn’t binary. It’s not like Coinbase custody will launch and suddenly every pension will throw $100 million into Bitcoin. It takes time for custody solutions to gain trustworthiness. But, I think we’ll have solid third party custody by September of this year.”
Solutions are on the Way
In late May, Paul predicted that third-party custodian solutions from companies such as Coinbase could gain sufficient trust from the public to lead institutional investors into the market.
While it may take many months to convince the first institutional investor to commit to the cryptocurrency market, Paul explained that the entrance of one institutional investor will trigger ‘FOMO’ — or fear of missing out — among large-scale investors, driving the next mid-term rally.
5/ That will allow institutional inflows to start accelerating. Once a couple big traditional money managers announce that they're including BTC as "digital gold" in their portfolios, others will follow. Again, not instantly, but I think fairly quickly.
— Ari Paul (@AriDavidPaul) June 1, 2018
This week, Coinbase revealed that regulated cryptocurrency custodian solutions are almost complete and will be introduced to the public market shortly.
Kyle Samani, a managing partner at cryptocurrency hedge fund Multicoin Capital — one of the many firms working with Coinbase to introduce the first suite of institutional cryptocurrency products — echoed Paul’s stance, emphasizing that custodianship is been the final barrier to broken for large-scale institutional cryptocurrency adoption.
According to Bloomberg, a Coinbase spokesman alluded to their expected success regarding approval to serve clients requiring a qualified custodian that meets the U.S. regulations.
Mike Belshe, the CEO of BitGo, also disclosed that they have begun discussions with the US Securities and Exchange Commission (SEC) — after acquiring a qualified custodian called Kingdom Trust — to become a custodian in the mid-term to work with large-scale institutional investors.
“We filed with them some time ago now. Hopefully it will be coming together soon. We are working with several hundred hedge funds and wealth managers who are waiting for the approval.”
Academia is also Interested in Cryptocurrency
In an interview with Oscar Williams-Grut from Business Insider, John Lore — an attorney that works closely with cryptocurrency companies — stated the market has seen a stark increase of academic institutions involving themselves in the cryptocurrency market:
“We’re seeing some academic institutions getting involved on a limited basis for strategic reasons. I can’t say the names of [the academic institutions] because that’s attorney-client but we have people mostly on the East Coast that have begun doing investments in this space on a fairly modest basis.”
While most analysts have admitted that there are no institutional investors in the cryptocurrency market at the moment, they unanimously agree that these parties are currently sitting on the sidelines due to the lack of institutional cryptocurrency products. With respect to this, once custodian solutions are readily available, institutional investors will commit to the cryptocurrency market.
Cover Photo by Mac Blades on Unsplash