Years to come we will see the crypto landscape changed by the momentous events of 2022. There are significant differences between this one and the previous crypto winter, notwithstanding the anxiety surrounding the potential impact. With participants and prices reeling after the failure of TerraUSD, Celsius, Voyager Digital, and eventually FTX, cryptocurrency spent the majority of 2022 in free fall.
Lessons from a terrible 2022, which include the fact that decentralized finance, or DeFi, is hackable, cost crypto enthusiasts dearly. Additionally, the demise of a single major cryptocurrency exchange had the potential to shock the entire world, injecting skeptics further. As numerous institutional companies prepare to deal with assets being locked up in FTX’s bankruptcy proceedings, liquidity restrictions may also short-circuit regular market operations.
Along with the setbacks, there were some promising signs in the market as well. Major financial institutions began showing interest in digital assets and the U.S. government began expressing interest in its regulation and potential adoption, and cryptocurrency entered more positive and popular dialogues as well. (See our blog piece on the world of crypto in 2022, where we discussed many exciting and positive developments such as the promising coins, cryptocurrency adoption, and the increase in investor interest).
In this article, we’ll explore some of the reasons why institutional investors are interested in crypto and how their trend of investment might be in 2023.
Institutions are ramping up their crypto holdings
A report released by Autonomous Research revealed that institutions have been buying more crypto than ever before, and the rate of purchases is accelerating.
Crypto investment firm Galaxy Digital has also seen a notable increase in institutional interest in the space. The company’s CEO Michael Novogratz told CNBC during an interview that “There’s never been a better time to get into crypto.”
In light of this, we may observe:
An increased need for regulatory certitude
In the wake of the FTX collapse, legislators now feel pressured to establish the basic risk controls for crypto-asset activities and to specify which government bodies are in charge of what in light of the instability in the cryptocurrency markets in 2022.
Changes to crypto lending procedures
Most likely, we will observe a maturing of lending processes in the cryptocurrency sector, including suitable collateralization, underwriting criteria, and asset/liability management. In order to prepare for future markets that are less volatile, we anticipate lenders to do more thorough due diligence and stress test potential vulnerabilities. The source of inventory in this market may shift from historically being retail-based to institutional investors in 2023, which could be another key trend.
The acceptance of cryptocurrency by institutions was widespread in 2022, along with the establishment of numerous new partnerships, despite widespread market instability and smaller trading volumes. Despite the unfavorable short-term price movement and the actions of certain actors, a recent institutional Investor survey sponsored by Coinbase revealed that investors still believe that cryptocurrencies are here to stay.
The amount of money invested by institutions in the digital economy will increase
With their large sums of money, institutional investors will take significant risks. More traditional, blue chip funds (such as KKR and Hamilton-Lane combined with Securitize) may likely tokenize in the future, making them more accessible to a wider range of investors regardless of market movements. In addition, a growing number of large cap market companies (such as JPMorgan, HSBC, Fidelity, and Goldman Sachs) will enter the tokenization field, and mergers and acquisitions will significantly increase.
But here is a catch to all of this: whether or not politicians and regulators step up to offer some essential stability.
Research indicates that one of the key growth sectors in 2023 will be the tokenization of real-world assets (RWA).
Tokens versus tokenization
The idea of tokenizing real world assets (RWA) has been around for a while, but it has recently garnered a lot of interest among financial services providers as a way to address the inefficiencies present in conventional securities settlement. When opposed to investing directly in tokens, tokenization is for certain organizations a less hazardous option to gain exposure to the cryptocurrency market. Whatever the cause, it’s crucial to remember that during the previous crypto winter in 2018–19, tokenization did not enjoy the same level of support among these entities. Instead, banks are now making use of tokenized forms of financial instruments in a number of institutional DeFi use cases, frequently using open blockchains.
CoinMetrics, an analytics company, outlined potential development areas for the cryptocurrency market in 2023 in its most recent study on January 4th. One of those emerging markets was the tokenization of physical assets, according to the report.
Physical and conventional financial assets are represented as digital tokens on a blockchain during the process. Then, exactly like stocks, the tokens can be purchased, sold, and exchanged.
Furthermore, this enables those who do not or are unable to hold the physical assets to invest in a safer and more efficient environment. It used the recent pilot program for tokenizing various projects by several banks to shorten transaction settlement times as an example. Additionally, in November 2022, JPMorgan, Deutsche Bank, and SBI exchanged sovereign bonds and tokenized currencies. For the experiment, they made use of the Polygon layer 2 scaling network on Ethereum.
According to the research, “this illustrates the growing embrace of RWA tokenization by large financial institutions, and their adoption of L2 for scalability.”
Additionally, the number of loans guaranteed by RWA has increased. According to CoinMetrics, this demonstrates the “increasing demand for RWA tokens as a means of financing real world assets.”
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