Key Takeaways

• Crypto.com this week shut down its institutional exchange in the US, citing a lack of demand
• The regulatory climate has worsened significantly in the US, meaning crypto is becoming less practical for institutions 
• The macro picture and scandals across the space last year have also contributed, writes our Head of Research, Dan Ashmore

Two months ago, I put together a piece analysing institutional money and crypto. Specifically, it asked whether institutional cash had fled the industry. 

This weekend, we got the latest demonstration of quite how stark the exodus of institutional money has been. Crypto.com announced they were shutting down their institutional exchange in the US, blaming a lack of demand. While the retail platform will stay open, the institutional platform will no longer be operational. 

This is no surprise. Neither is the timing, as the announcement comes amid the increasingly hostile regulatory crackdown that is occurring in the US. Both Binance and Coinbase were sued by the SEC last week, with fears increasing that crypto will be pushed offshore. 

But while it is a key factor, the reasons for institutional cash jumping ship are not just limited to regulation. 

Macro environment

During the pandemic boom, we saw Tesla announce they were purchasing Bitcoin to hold on their balance sheet (before later selling most of that Bitcoin). We saw fund managers on TV seemingly daily, discussing the heightened demand from their clients to offer Bitcoin investment vehicles. A Bitcoin spot ETF was rumoured as imminent. 

Fast forward eighteen months, and things are slightly different. Despite a run-up of 55% this year, Bitcoin remains 60% off its peak as markets across the financial system have struggled. 

This follows a transition to tight monetary policy – the first regime of its kind during Bitcoin’s lifespan, which was launched in 2009 into what would become a decade of basement-level interest rates. 

The increasing interest rates have pushed institutions back on the risk curve. T-bills today offer 5%, a viable alternative, unlike the near-zero rate offered for most of the last fifteen years. This alternative and the syphoning of liquidity out of the system, with the hope of curtailing rampant inflation, has suppressed the price of all risk assets. The tech-heavy Nasdaq demonstrates this well, losing a third of its value last year. Bitcoin is even more risk-on than tech, and it has struggled to attract funds as a result. 

Reputation

While the macro picture is outside of the crypto industry’s control, perhaps the most concerning development is the damage to its long-term reputation. Last year saw the spectacular collapse of the UST stablecoin, part of a once-thriving $60 billion Terra ecosystem. Then followed Celsius, Voyager Digital and a host of crypto lending institutions who were caught up in the contagion. 

But perhaps it was FTX’s shocking demise in November, led by disgrace Sam Bankman-Fried, which was the cherry on top. The exchange’s kingpin had lobbied on behalf of the industry for congress, appeared on the front page of magazines, and had Wall Streeters swooning over his charisma and drive to take crypto the top. 

It was all a lie. For some, it may have been the straw that broke the camel’s back. You know when Bitcoin bull Cathie Wood is concerned over the fallout for institutions that there is a problem (she is sticking by her $1 million price prediction for Bitcoin).  

“The one thing that will be delayed is perhaps institutions stepping back and just saying, ‘OK, do we really understand this?’”, Wood said in an interview with Bloomberg last year. 

Regulation

Regardless of whether institutions see crypto’s reputation as sullied, or whether the macro picture dents its attractiveness for managers, the issue of regulation is a pressing one. Even if institutions want to buy, the crackdown in the US could make it significantly harder to do so. And the greater the friction, the less likely mass pickup is. 

There is very real concern that the American crypto industry is being curtailed to such a degree that companies will be forced to migrate elsewhere. As I wrote last week, I don’t think certain counterparties in the crypto industry have helped themselves (and that ties into my point earlier on reputation), but whether it is deserved or not is kind of beside the point. It’s happening, and that is all that matters. 

For institutions, that means it’s only getting harder and harder to buy. What funds are going to be willing to load up on Ethereum while nobody is sure whether it is a security, and while the exchanges through which they want to buy it are fighting lawsuits from the SEC?

Final thoughts

There is nothing particularly groundbreaking in this piece. All these developments are plain to see. There are no charts, minimal data, and not much beyond some obvious surmising. But in a way, that is kind of the point. The change in the space over the last year, especially regarding institutional attitude (and that means beyond the crypto bubble!), is striking. 

The crypto landscape has had many ups and downs over the years, but the conwern this time is that, while the percentage decline may be similar, the previous bear markets did not happen on such a big stage. The dollar amounts of bigger, but the reputational blow is too. This was crypto’s big time in the lights. Institutions were genuinely looking towards this as a reputable asset class elbowing into the mainstream. 

While this could help Bitcoin separate itself from the crowd and carve out its own niche (even more so than it has already done), it has still been a setback. But the true concern is more with the rest of crypto, which faces a much tougher battle to regain any semblance of legitimacy.