Is Wall Street Cooling Off On Cryptoassets?

2018 saw a reversal in cryptocurrency markets and fortunes. After last year’s skyrocketing valuations, a dismal crypto winter set in as valuations and trading volumes nosedived. Retail investors exited markets even as Wall Street and other institutional investors made moves. What does the situation look like for institutional investors at the end of 2018? 

Two recent reports paint an interesting picture of institutional trading in cryptocurrencies currently. While mainstream organizations have quietly put their crypto plans on the back burner, other institutional investors have shifted their trading activity from cryptocurrency exchanges to OTC markets.  

Few Customers and A Shift Towards OTC Markets

According to a Bloomberg report, Wall Street’s plans to take advantage of bitcoin’s volatility have been “shelved”. Hallowed Wall Street firm Goldman Sachs has found only 20 clients for its Non-Deliverable Forward (NDF) futures contract, a new type of futures contract for betting on bitcoin. The company is also a clearing agent for bitcoin futures. (But, according to earlier reports, it charges a hefty margin, sometimes as much as 100%, for the activity). The appointment of a new digital assets head in June also did not change the equation for cryptocurrencies at the firm. 

At the recent Coindesk Invest conference, Justin Schmidt, the head digital assets at Goldman, told audiences that regulatory uncertainty for cryptoassets had stymied his efforts. The situation at other major banks and investment firms is not much different. Morgan Stanley and Citigroup are yet to see traction for their cryptocurrency-focused products while the Barclays digital assets group head, whose task it was to explore their potential for business at the firm, left after only 8 months on the job. 

A Diar report analyzes trading volumes at Coinbase, North America’s biggest cryptocurrency exchange, and compares it to those for Grayscale’s Bitcoin Investment Trust, which is traded on OTC markets. (The latter witnessed a surge in trading and premiums during the run up in cryptocurrency prices last year). It concludes that institutional investors, which mostly comprise crypto-focused hedge funds and traders, have shifted their funds to OTC markets. “The shift could be a sign of investors selling private placement in a market that has seen regulatory clarity, at least in terms of Bitcoin, the development of custody solutions, many of whom have secured insurance cover, as well as multiple OTC trading desk avenues,” the publication writes. 

An Expected Development 

Wall Street cooling off on cryptocurrencies is to be expected. A legal framework for operating is essential for a heavily-regulated industry, such as the financial services industry. Its hesitancy in embracing cryptocurrencies is also a function of the asset’s complexity. At the Coindesk conference in November, Goldman’s Schmidt also told audiences that he spent much of his time at Goldman educating the firm’s traders about cryptocurrencies and their workings. His views were echoed by Michael Sonnenshein, managing director at Grayscale Investments, who said education was key to attracting more institutional investment. 

Regulatory uncertainty has also pushed investors away from cryptocurrency exchanges, most of which function as money-transmitter services, towards OTC markets. A report by research group TABB group earlier this year estimated bitcoin OTC volumes at $12 billion globally. But Lucas Nuzzi, from Digital Asset Research, estimated them to be in the region of $250 million.

These developments could be a precursor to regulatory clarity and an increase in trading volumes next year. Already new Wall Street platforms to enable cryptocurrency trading have emerged to provide alternate venues for cryptocurrency trading.