In the wake of Terra Luna’s collapse and bearishness compounded by the macro outlook, all eyes are on institutional investors. Once perceived to be anchoring crypto’s triumph into the TradFi ecosystem, institutions are now getting out of their positions, regardless of cost, raising the question – will they still be around after all this is over?
Sentiment-Check
The general sentiment errs on the side of caution as speculation continues to fester on how the collapse of UST would trigger global regulatory authorities to tighten control within the crypto sphere. However, despite the market uncertainties, some view the long-term growth outlook of the industry to be healthy as investors continue to keep an eye on DeFi.
“The crypto industry has its own vitality and innovation that is undeterred by any external forces or regulations…More than 100 institutions have expressed interest in using Matrixport’s ‘DeFi connector’ on the custody solutions-side. The problems today are only temporary hurdles and long-term participation in DeFi is unlikely to slow down” — Cynthia Wu, Founding Partner and COO, Matrixport.
In fact, institutions are still exploring DeFi as a field to build their long-term presence. On 31 May, Singapore’s monetary authority announced “Project Guardian” to explore the tokenization of financial assets and use cases of DeFi, which will be done in collaboration with DBS Bank and JP Morgan, indicating that the institutional interest in digital assets is not going away any time soon.
The Comeback Strategy
As more institutions explore exposure in DeFi, their investment strategies have also evolved with it. In Q4 of last year, hedge funds were seen to be undertaking basic market-neutral trading strategies on central exchanges in search of a stable yield. Now, with the market seeing low volatility levels and lacklustre yield across the board, institutions are deploying a significant portion of their AUM into DeFi as they look to seek alpha.
In light of this, the concerns of risks and secure infrastructure come to the forefront. Most institutions are conducting due diligence on counterparty risks and actively monitor the yields and liquidity. To facilitate this, many professional services, like Matrixport, offer an additional layer of assurance with robust auditing infrastructure, on par with institutional standards — ultimately, to create a more protected environment so that more investors feel safer to deploy assets into crypto.
The Next Score
Moving forward, in tandem with the growing sophistication of the institutional investor pool, more advanced yield strategies like smart contract protocols and vaults that earn yield pickup by selling options will be in the works by financial services providers. These platforms will also take a chain-agnostic approach by offering services across all dominant layer1 chains.
Despite the gloomy outlook today, there are many opportunities and innovations in crypto and DeFi that still prove it as a worthy opponent to other traditional assets. The fact remains that institutions are eager to score access to crypto and it is up to the industry to understand their needs and be the enablers for their foray.