Breaking Down the Barriers to Institutional Cryptocurrency Investment

Institutional investment in cryptocurrencies is on the rise. A recent survey from Fidelity Digital Assets[1], encompassed a range of nearly 900 investors spanning crypto hedge and venture funds, traditional hedge funds, endowments and foundations, financial advisors, family offices and high net worth individuals, and found that:

 

  • 36% of institutional investors surveyed currently invest in crypto.
  • Crypto investments appeal to almost 80% of those surveyed.
  • More than 6 out of 10 investors believe that crypto has a place in portfolios.
  • More than 80% of investors expressed an interest in institutional investment products that hold crypto.

The same survey also found that the most common obstacles to inclusion of crypto in investment portfolios are price volatility, concerns around market manipulation, and lack of fundamentals and market data to enable valuation.

What does this mean for crypto exchanges, many of which were originally established to service a retail customer base? And as a crypto exchange operator, as you move up the value chain to higher-value institutional investors, what do you need to do in order to attract this lucrative and growing market? How can you tailor your products and services to give you a market-leading edge over your competitors?

What do institutional investors want?

For a start, institutional investors have very different needs and wants to retail investors. In order to understand these, we need to look to the traditional financial markets world in which these investors are most comfortable. They offer a highly regulated environment, accessible, high quality and reliable market data, fast and standardised connectivity, and a host of other tools to enable confidence in investment decision-making and execution.

In our discussions with institutional brokers, asset managers and hedge funds, our team at Chronicle has found the same themes emerge time and time again. Institutional investors are seeking the same ease of use and trading tools that are available on traditional exchanges:

 

  • Standard connectivity through industry-recognised APIs.
  • Low latency performance even under high-throughput, volatile market conditions.
  • Support for multiple order types – beyond limit and market orders.
  • Trusted market depth and market data.
  • RFQ support for multi-broker / multi-dealer sessions.
  • Block trading – dark pool trading for institutional investors and large block sizes.
  • Support for multiple and more exotic asset classes, such as cash-settled futures, and options.
  • Standard post-trade notifications and messaging, and connectivity to third-party custody providers.
  • High performance, even under exceptional market conditions.

 

Delivering these poses a challenge for established crypto exchanges, as the technology and architectures underpinning many of these requirements are far more complex than those required to support a retail customer base. It is often not realistic to contemplate adoption of a traditional equities trading platform – they can be expensive, involve lengthy migration periods, and are simply not geared up to support both retail and institutional needs. They also may not fully support the product requirements of crypto investors, particularly given that many institutional investors gravitate towards cash-settled futures and other derivatives products. The crypto market has fundamental differences when compared to traditional markets. Some crypto exchanges support settlement in fiat currencies, others in cryptocurrencies only. Some have a tight vertical integration with their own custody offerings, others integrate with multiple third parties for settlement and custody.

 

And then we have the regulatory dimension, as regulators around the world move to bring crypto trading under their supervision, and to introduce more stringent regulatory requirements around trading activity. On one hand, this tends to make crypto trading more attractive to the institutional sector. On the other hand, it will ultimately usher in a host of additional trade and market data collection and reporting requirements. Even if these are not currently in place, an exchange operator looking ahead in the direction of travel must take these into account when future-proofing its business and its technology platform.

 

How can Chronicle help you adapt to an evolving clientele?

 

Chronicle Platform contains all the essential infrastructure components for a trading system, including functionality to support market connectivity, messaging, data access, storage and retrieval. It enables firms to rapidly develop and deploy trading solutions, with support for book-building, position management, pricing, hedging and order generation. It is an elegant, one-stop solution to many of the challenges that arise time and time again when developing trading systems, using an efficient and lightweight architecture. And we can help you get up and running on your new platform fast – with typical implementation times of around six months! Our support and training framework reduces time to market, whilst also reducing overall delivery risk.

 

Choosing Chronicle Platform as the infrastructure for your trading platform gives you:

 

  • A secure, resilient and trusted infrastructure for rapidly developing highly performant, scalable and high-throughput low latency trading systems.
  • Market connectivity through known and trusted standards including FIX, REST and WebSockets.
  • Support for standard order types, as well as the ability to create custom order types.
  • The ability to build reliable market depth and market data, either specifically for your own exchange, or consolidating data across multiple exchanges.
  • Support for multiple trading protocols, including order books and RFQs, across multiple asset classes.
  • Enhanced features such as:
    • Resolution of crossed markets.
    • Ability to ensure balanced positions across the exchange.

 

If you’d like to talk to us about how Chronicle and our products can help your firm realise its true potential, contact Andrew.Twigg@Chronicle.Software

 

[1] https://www.fidelitydigitalassets.com/bin-public/060_www_fidelity_com/documents/FDAS/institutional-investors-digital-asset-survey.pdf

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