‘Mainstreaming’ may not be a word to everyone’s taste, but it’s been music to the ears of the crypto world this year.
Crypto’s year of mainstreaming
Tipping point ahead
Such data make the road to mainstream crypto adoption look like a one-way street. For sure, there are no guarantees that the path will remain a straight one. But if, as readings suggest, retail client demand is approaching a tipping point, before too long, institutions will have little choice but to play a pivotal role in delivering crypto investment products to individuals on a large scale.
Considering that cryptocurrencies are still widely regarded as ‘unconventional assets’ it is ironic that these coming products are likely to follow tried and trusted forms when they hit mass markets.
Chiefly, it is the advent of regulated exchange traded crypto funds that is beginning to look inevitable. Note that although several exchange traded products tracking digital assets already exist, the class of ETPs authorised by global regulators—like the UK’s FCA and the U.S. SEC—is largely reserved for those designated as ETFs. Given that institutional product and services providers will need regulated assets to properly fulfil broad retail mandates, the first regulated crypto ETF to be approved by regulators is likely to provide the next true watershed in the acceptance trend. (Regulators are likely to demand that such a vehicle must utilise regulated price data such as those underpinning CF Benchmarks' Ultra Cap 5 cryptocurrency benchmark index.)
Of course, rising demand won’t make the perceived risks for providers disappear. These risks now represent the principal speed bump on the corporate side. Indeed, a look at the comments accompanying the Fidelity Digital Assets survey mentioned above shows the typical risk factor applying brakes for potential product providers remains cryptos’ notorious price volatility.
53% of investors surveyed cited concerns about the frequency and extent of outsize price moves. Still, there's also a rising recognition that crypto market turmoil should rank alongside hazards that beset many risky assets, including certain equity sectors, commodities and others. In other words, the tendency to avoid cryptocurrencies due to price variability alone is fading.
Regulated stands out
The second-highest concern expressed by respondents in Fidelity’s research was market manipulation, a factor cited by 47%. Again, though this specific risk is also not germane to cryptocurrencies, the conventional perception is that it’s more egregious in the digital asset space. Here though, some of the most up-to-date soundings signal that investors recognise that remedies for nefarious price action are already within reach.
Open Interest vs Volume by Exchange TypeSource: ZUBR
Concluding that traders showed a higher propensity to close positions more quickly on unregulated exchanges than on regulated ones, ZUBR interpreted this as indicating participants were displaying a higher degree of trust in regulated environments than in unregulated environments.
Bad acting and deep pockets
That trust can easily be tied back to the concern institutional investors indicated was the second-biggest deterrent against committing to crypto, the fear of price manipulation. With a higher persistence of open trades on regulated exchanges than on unregulated venues, it’s clear where manipulation risk is perceived to be higher.
In fact, the perceived disparity in manipulation risk is addressed succinctly by CF Benchmarks, the only officially authorised cryptocurrency benchmark provider. Importantly, CF Benchmarks’ methodology underpins cryptocurrency price data adopted by the CME Group for its cash-settled crypto futures contracts. These price feeds are known as CME CF Reference Rates, published once a day, and CME CF Real-Time Rates, published continuously in real-time.
In a submission of comments to the SEC last year, CF Benchmarks noted a number of anti-manipulation features in its Bitcoin pricing methodology. These comments are summarised below.
All told, though price-manipulation fears are among the last remaining misgivings institutional market participants have against investing in digital assets, methodologies are now available that go a long way towards neutralising those concerns.
As we’ve seen, though manipulation remains a worry, major investors are already pointing the way to resolving that worry with a preference for regulated price data and regulated exchanges over unregulated price data and unregulated exchanges.