Much of the coverage in the cryptocurrency space over the past several months has focused on the effects of the coronavirus: companies adapting to new circumstances, the sudden upswing in fintech adoption and new crypto users, and predictions that economic turmoil could make crypto bigger than ever.
However, while the pandemic and all of its accompanying events have continued to rattle on throughout the world, certain aspects of the cryptocurrency industry have continued along the trajectory that they were already on before the coronavirus–albeit perhaps slowed, interrupted, or–in some cases–sped up.
One of these is the entrance of institutional investors into the crypto space, and the accoutrement that has come with them: wider-spread regulation, an increase in trading tools and features, and much more liquidity in crypto markets.
Recently, Finance Magnates spoke with Ciara Sun, head of Huobi Group’s Global Business & Markets. Ciara talked about the state of the institutional cryptocurrency market, how the market is going to continue to change, and about Huobi’s place in the future of the market.
At Huobi, Ciara oversees the company’s global expansion across various business segments, including global institutional business, emerging markets, and more.
She is also highly experienced in financial analysis, strategic consulting, and corporate management, and has worked across multinational consulting companies. These include Boston Consulting Group, Deloitte Consulting, and Ernst & Young.
Insitutional traders are coming into crypto for two reasons, Ciara said
We asked Ciara for her thoughts on the current state of the institutional cryptocurrency market.
“Cryptocurrency has been on an institutional route for years, but the current market volatility and economic climate has created a very ideal environment for institutional traders–it’s a perfect storm; there are volatility and uncertainty in the traditional financial markets; central banks around the world are printing record levels of new currency. Inflation is booming, and Bitcoin just had its third halving.”
However, with everything that’s happening in the world, Ciara said that there are two main reasons that institutional traders are currently entering the market: “the first is that investors are looking for a way to hedge monetary policy risks, like quantitative easing.”
“Bitcoin isn’t a safe-haven asset in the same way that gold is, but its decentralized nature means that it’s less likely to be impacted by the policies or actions of any single government. This is part of the reason why investors flock to digital assets when there are political turmoil or currency devaluation risks.”
“The second reason is that institutions are entering the market is pretty simple,” Ciara continued. “They’re looking for returns in a volatile market.”
“Derivatives contracts…have become increasingly popular amongst the institutional crowd.”
Indeed, “the cryptocurrency market can be very good for traders who can hedge their risks while still finding arbitrage. Derivatives contracts like futures contracts and perpetual swaps have become increasingly popular amongst the institutional crowd.”
This may be why “institutional investors are very active in the spot markets, but we’re seeing even more growth in the futures and derivatives market.”
“For example, we’ve seen institutional trading volume on Huobi Futures grow more than 80 percent in recent months. One common misconception we come across as it relates to the derivatives market is that high leverage is kind of related to gambling–but this isn’t true when it comes to institutional traders.”
This is because “these kinds of traders have a very strong understanding of investment risk, and they know the importance of hedging. [Therefore], it’s much more math than just luck.”
“This year is a very special year given the COVID-19 situation.”
Ciara said that she believes that the decentralized nature of Bitcoin and other cryptocurrencies is particularly meaningful to institutional investors in 2020 compared to the 2018 and 2019.
“This year is a very special year given the COVID-19 situation,” she said. The whole economic climate has become [more] volatile; we can see that there are complex, different perspectives of different governments; Bitcoin, as a very decentralized asset, has a good position in this current economic situation.”
But changes in the institutional market in 2020 haven’t all been driven purely by the coronavirus and the economic fallout that ensued from the pandemic.
“We’re also seeing institutional investors getting much more serious about compliance and regulations, both in the assets they trade and the platforms that they trade on.”
“When the whole cryptocurrency space started 10 years ago, it was pretty wild; now it’s getting much more serious and regulated.”
”Regulators are stepping up their efforts in classifying and regulating digital assets.”
Part of this is because of the fact that many institutions have a specific set of standards and requirements regarding “what and where” they trade.
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Ciara also explained that this is also “due to the fact that digital assets are becoming more prominent in every market,” so that “regulators are stepping up their efforts in classifying and regulating digital assets.”
“Institutional investors know that compliance is critical for the long-term sustainability of the industry,” she continued.”
“We as a company have been putting a lot of effort into trying being fully compliant and regulated for every market that we go to; we are probably one of the exchanges that holds the most licenses in the whole space. We’ve got licenses in Gibraltar, in Tallinn; we are the first group of exchanges that got the exchange license in Japan.”
“HT, our platform token, has also passed regulation by local regulators [in Japan] and is now a regulated and fully-compliant asset that can be traded in Japan.” The token was officially listed today, June 16th, 2020.
‘We can see growing credibility happening in the space.”
As more institutional investors into the crypto space, regulators have moved more quickly and more thoroughly to provide regulations for crypto markets; in turn, this has caused even more institutional investors to come into the space.
Ciara sees both forces–the entrance of more institutional investors as well as the appearance of more regulators–as a positive thing for the cryptocurrency ecosystem as a whole.
‘We can see growing credibility happening in the space,” she said.
“One of the biggest changes that we’ve seen in the last year is that cryptocurrency exchanges are gaining more credibility at a much quicker pace. Some of this can be attributed to the acceptance of digital asset trading on major platforms, like CME, which likely attracted some institutional traders.”
“We’re also seeing many big names in traditional finance–like Paul [Tudor] Jones–that are now adapting and investing in Bitcoin and in other digital assets. So, credibility and institutional adoption seem to be closely correlated.”
Institutional investors could be paving the way for mass retail adoption
“When institutional traders come into the game, it means that they need more features and more professionally-operated platforms; they’re driving regulation and compliance, driving credibility. They’re also driving liquidity in the market.”
“So, I think that in those ways, [institutional investors are] really making the whole ecosystem more healthy,” and as such, are paving the way for “mass adoption, even for retail traders.”
“For retail traders, liquidity is also important–it affects the prices that they can get for their crypto,” she explained. Additionally, “when compliance and regulation come into play, we can see fiat ramps getting ‘solved’ in many countries. So, it’s really bringing cryptocurrency all over the world–people who hold [all kinds of] different fiat currencies can [now] trade crypto.”
Additionally, as more institutional traders have continued to enter into the cryptocurrency space, the cryptocurrency space has continued to look more and more like the traditional financial space: “one thing we see in the institutional [crypto] space is increasing demand for new trading products,” Ciara explained.
“Now, more than ever, institutional traders are looking for more and better ways to hedge risk and create arbitrage. They want more complex financial instruments within a safe and reliable trading environment.
”Within the next five years, more than 85 percent of institutional investors will have exposure to digital assets in their portfolios.”
And as the trading environment continues to become more conducive to institutional entities, Ciara believes that there will be huge growth in institutional involvement in the cryptocurrency space.
“I think that within the next five years, more than 85 percent of institutional investors will have exposure to digital assets in their portfolios,” she said. “Secondly, as a result of the institutional need for regulatory compliance, many of the smaller exchanges that meet regulatory requirements will either shut down or get consolidated.”
“In the immediate future, Bitcoin will remain a top cryptocurrency for institutional investment,” she continued. “The crypto derivatives market will lead growth in the institutional factor as more sophisticated investors enter the space.”
“Asia currently dominates the institutional crypto market, but the west will soon catch up as digital assets become better-defined and regulated.”
“We want to be the leading and most trustworthy exchange in the world.”
As such, Huobi is making a push towards the western hemisphere.
“People know Huobi as one of the biggest brands in the eastern market; we are really determined to go global and go to the western market.”
So, “currently, our trading volume in terms of east versus west is 60-40, which is not that bad,” Ciara explained.
Still, “we are continuing to put more efforts to bringing a stronger branding in the western market–to go out there and talk to media, talk to our partners, and talk to our communities and our users to make sure that they know who Huobi is and what we stand for, and what our vision is, and what we want to achieve.”
And what is that, exactly?
“We want to be the leading and most trustworthy exchange in the world,” she said.