Ari Paul, a co-founder and chief investment officer of crypto investment firm BlockTower Capital, has said that capital from institutional investors may come into Bitcoin by the third quarter of 2019.
I didn’t talk to many institutional investors in the second half of 2018. Just spent a day and a half at an allocator conference talking to many family offices and a few banks. Here are my takeaways.
— Ari Paul (@AriDavidPaul) February 1, 2019
But, the investor said that several major factors are holding institutions back from investing in Bitcoin and in the rest of the cryptocurrency market.
What are the Factors Holding Back Institutional Investors?
Generally, Paul explained that institutions classify Bitcoin in three categories:
- Venture capital investment
- Hedge or safe haven asset like gold
- Asset for active trading
In all three categories, there are hurdles that prevent large-scale investment firms from diving in.
Bitcoin as a long-term investment or blockchain projects as venture capital investments present a viable opportunity for investors given that the valuation is reasonable.
Last year, when the valuation of the cryptocurrency market achieved $800 billion, many blockchain projects without active user bases and products were valued at hundreds of millions of dollars.
Investors are still trying to figure out the right valuation for crypto assets and the bear market has proven to be important in that regard.
But, many companies in the cryptocurrency industry are awaiting governments to provide regulatory clarity on many areas.
For instance, major banks including Goldman Sachs reportedly explored the possibility of establishing crypto-related custodian services.
Most institutions with the exception of Fidelity have ended up abandoning their plans to run a Bitcoin custody service due to regulatory uncertainties.
In November 2018, a Goldman Sachs executive said that the firm is still unable to operate as a custodian for crypto investors due to regulatory issues.
“As an example on regulatory clarity side, we all know BTC is totally legal, but the rules around being a custodian of Bitcoin and how to handle things like hard forks still unclear. AML/KYC requirements still murky for service providers.”
Admittedly, Paul stated that he has been too optimistic about the potential inflow of institutional money in crypto.
Over time, as the infrastructure supporting cryptocurrencies improve with the entrance of large-scale financial institutions such as ICE and Nasdaq, more institutional investors could consider cryptocurrencies as an established asset class
“I’ve been too optimistic about the pace of institutional adoption in the past. It’s coming, but I can’t estimate which quarter (Whether that’s this year or 2022) that we’ll see a big spike. As a humble guess, something like Q3 2019,” Paul said.
Don’t Wait on It
Institutions are not in a hurry to invest in the cryptocurrency market. Most firms are waiting to see other institutions enter the market and proper custodial solutions to be established.
Although Bakkt, Bitcoin ETFs, and futures markets have been overplayed as major catalysts of the next potential bull run for the most part, they could appeal to institutional investors in the long run.
For now, there is no statistical data to prove that Bitcoin is a safe haven asset that can be used to hedge against the global economy.
As such, more institutions may consider Bitcoin as an early-stage venture capital investment, especially if the dominant cryptocurrency drops further in value below its 12-month low at $3,122.
Is the bottom in? Not yet.
In order for the bottom to be in, the volume of coins changing hands becomes steady, currently it's very erratic, synonymous with middle of the bear detox. (In this chart I'm tracking the volatility of on-chain volume). pic.twitter.com/aVYI1Ortxh
— Willy Woo (@woonomic) January 14, 2019
Analysts generally foresee more bloodbath in crypto markets before Bitcoin establishes a proper bottom and expect the market to begin recovering in the latter half of 2019, which could attract both retail and institutional investors with a low price range.
Featured Photo by Jose Aragones on Unsplash