The convergence of traditional finance and crypto
According to the latest data, the global crypto market capitalization stands at $1.73 trillion at the time of writing. Part of this push is due to the potential of the crypto market to be used as a hedge against current economic conditions in the traditional sphere.
The cryptocurrency market, although new, is entering hyper-growth mode.
According to the last Data, the global crypto market cap stands at $1.73 trillion at the time of writing. Part of this push is due to the potential of the crypto market to be used as a hedge against current economic conditions in the traditional sphere.
An increase in institutional investments
Although volatile, the crypto market offers promising opportunities for retail and institutional investors. Thanks to the inherent characteristics of the underlying blockchain technologies, cryptocurrencies offer a myriad of advantages such as the absence of dependence on intermediaries, seamless cross-border transactions, end-to-end security, data confidentiality and transparency. Add to all these factors the limitless possibilities offered by the DeFi (decentralized finance) sector, and you will understand why an increasing number of retail and institutional investors are opting for digital assets.
As global crypto market capitalization has skyrocketed, the DeFi sector has also positioned itself as a safe haven for institutional investors and hedge fund managers. Over the past two years, big names in the traditional financial industry have gradually entered the crypto ecosystem, indicating that the market is finally warming up to the idea of digital assets.
From closed communities created to shun the idea of crypto, to open forums discussing better ways to make crypto accessible and regulated – institutional influence has changed the dynamics of crypto, DeFi, and other related fields. In one to study published by Fidelity Digital Assets, 52% of institutional investors said they invest in digital assets, and nine out of ten said they were actively exploring opportunities in this new and promising field.
Lowering barriers to entry for institutions
Exchanges, both centralized and decentralized, play a key role in helping to reduce many of the barriers that once held back institutional adoption. Today’s digital marketplace is well-equipped with the infrastructure required to facilitate institutional-grade services, coupled with country-specific regulatory and compliance frameworks, providing institutions with more clarity on the evolution of the crypto sectors and of DeFi.
At the same time, the crypto market is continuously maturing in terms of utility, thus making its way into the broader investment category – like stock market tech stocks. Consequently, investors are looking beyond the ever-popular “gold-like” store value of Bitcoin and are increasingly investing in utilities.
For example, between 2020 and 2021, institutional investors heavily invested in Ethereum (ETH), Solana (SOL), Terra (LUNA), Binance Coin (BNB) and several other layer-1 cryptocurrencies. Meanwhile, many institutional investors are also expanding their crypto portfolio beyond layer 1 technology, invest in layer 2 scaling solutions, metaverse tokens, NFTs and also participate in the broader DeFi market.
This increased interest is certainly in favor of the crypto ecosystem, as it not only helps increase the market capitalization of digital assets as a whole, but also helps build trust and awareness in the nascent sector itself.
Traditional finance (TradFi) has been around for over a hundred years. It includes a diverse range of financial offerings, most of which are not currently available in DeFi. As TradFi merges with DeFi, it will help DeFi grow by offering more financial solutions such as unsecured loans, recurring deposits and more. Additionally, the TradFi industry experience in asset management, regulatory compliance, and other similar areas will also help the crypto ecosystem grow further.
Similarly, TradFi platforms can harness the power of blockchain technology to restructure their business models, which will benefit both service providers and customers. Using the power of decentralization, peer-to-peer exchange, and other similar features, TradFi companies can expand their services and introduce new financial solutions accessible to customers without geographic restrictions.
As interest and institutional investment in the blockchain and crypto sector is on the rise, we may soon witness the golden age where traditional financial products and cryptocurrencies become highly correlated, increasing value each other over time and reinforcing each other at the same time.
As noted in a recent blog post by AAX Academy, “we’ve been waiting for institutions to come out and play in the crypto sandbox,” and now, more than ever, it really seems to be happening. The year 2022 will be particularly interesting when it comes to this fascinating intersection in finance, and we will be on the lookout to see this new reality unfold.