What is shaping the future of the institutional crypto market?

Even five years ago, the basic infrastructure was much less developed in crypto. Institutions struggled to figure out how to store, exchange, clear, and settle crypto transactions reliably and compliantly. There were no real crypto prime brokers. Now, the infrastructure is much more developed and institutions have a better understanding and comfort level with the crypto landscape. As such, I anticipate that institutional trading will continue to grow.

Even so, spot crypto trading volume, especially Bitcoin, is still very fragmented.

Institutional adoption will also accelerate the growth of the crypto derivatives market. More regulation will also come, which will be a very positive development as long as it involves public discourse and is tailored to industry products to enable adoption and innovation while meeting the needs of regulators.

Related: What should the crypto industry expect from regulators in 2022? Expert Answer Part 1 and Part 2

In July 2021, Treasury Secretary Janet Yellen urged regulators to move quickly to create a regulatory framework for stablecoins. Since then, U.S. Securities and Exchange Commission (SEC) Chairman Gary Gensler has also called for regulation in this area and indicated that it is on the SEC’s agenda.

More service providers and institutional tools will come to market

However, institutions have a critical need for adapted services and tools. There has been a flurry of activity among startups looking to provide support services, such as crypto asset storage, security and management and investment products, as well as mining hardware and software and payment infrastructure.

Several companies had raised funding rounds of at least $300 million by August 2021, including Blockchain.com, BlockFi, Fireblocks, Ledger, and Paxos. I expect this to continue as new companies emerge to provide more accessibility to the crypto market than ever before. This, in turn, will open new doors for small and medium-sized funds.

Altcoins will become more popular

Next year, I also expect to see altcoins grow in popularity as enthusiasts learn even more about their various use cases. Ether (ETH), for example, is driven by DApp development with a robust ecosystem. However, due to Ethereum’s scalability issues and high gas fees, it has also been challenged by blockchain startups like Solana (SOL), Cardano (ADA), and Avalanche (AVAX). Investors see huge growth opportunities, while traders see volatility and pair arbitrage opportunities.

More generally, I foresee altcoins becoming more popular as investors look for ways to diversify their crypto portfolios. A Nasdaq report noted that as of October 2021, there were over 100 altcoins valued at over $1 billion, which “[implies] a thriving digital ecosystem. While altcoin prices can be just as volatile – and investors should do their research first – many altcoins, including Solana and Polkadot, continue to top lists of cryptocurrencies with the most potential for trading. become the next big thing.

Related: When and why did the word “altcoin” lose its relevance?

The volume will shift from Bitcoin to the altcoin Ether and is even now starting to change. For further proof, look to digital currency asset manager Grayscale Investments, which recently expanded its portfolio of investment products to include a Solana-focused trust.

“We’ve been at the forefront of mainstream acceptance and adoption of crypto and are increasingly seeing investors diversify their exposure beyond digital assets like Bitcoin and Ethereum,” the CEO said. Grayscale CEO Michael Sonnenshein in a recent statement, adding:

“Our Grayscale product family will continue to expand alongside this exciting asset class as we remain committed to providing investors with opportunities to access the digital economy.”

Regulated DeFi for institutions is coming

Decentralized finance, or the emerging ecosystem of financial applications that use blockchain technology, will have a big year in 2022. The total value locked (TVL) in DeFi has increased significantly in 2021.

To date, institutions have stayed away from DeFi because counterparties to DeFi transactions are largely unknown. Whether an institution wants to be a liquidity provider (LP) or trade on a decentralized exchange (DEX), regulatory clarity and compliance are paramount. This is why Aave has launched an authorized DeFi platform, Aave Arc.

In most DEXs, LPs do not have to pass compliance checks such as Know Your Customer and Anti-Money Laundering requirements. Looking forward to 2022, I expect DeFi growth to accelerate. Two challenges are likely to be addressed: the lack of regulatory clarity and the lack of counterparty compliance checks.

Related: From a DeFi Year to a Decade: Is Mass Adoption Here? Expert Answer Part 1, Part 2, Part 3

Greater regulatory clarity should emerge as the SEC and other regulators provide further guidance. And new DeFi platforms for institutions will gain traction. These platforms will require LPs and traders to pass compliance checks and provide ample liquidity to institutions.

With more clarity and the right platforms in place, more institutions will enter the DeFi space.

Security solutions will become increasingly common

Hacks have long been a part of crypto history. In 2014, for example, Bitcoin exchange Mt. Gox filed for bankruptcy after hackers allegedly stole millions of US dollars. Four years later, hackers stole another cryptocurrency exchange, Coincheck. And in August 2021, the DeFi platform Poly Network lost $600 million to hackers. MonoX Finance, another DeFi platform, lost $31 million even more recently.

Related: Crypto Exchange Hacks Report: 2011-2020

Now, crypto exchanges are starting to take steps to protect themselves and tend to partner with qualified custodians to manage custody risks. For example, Coinbase acquired crypto security firm Unbound Security in November 2021 to improve its multi-party computing capabilities. PayPal has also acquired another digital asset security provider, Curv. I expect to see similar offerings throughout 2022.

The crypto industry is changing rapidly with many twists and turns. But one thing is certain: the benchmarks for 2022 point to continued growth.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of TBEN.