When will we see crypto become a fully-fledged institutionalized asset class?
Investors have already seen steep returns from crypto, despite it being a young player, but it’s the young player status — as well as still-evolving trust, lack of widespread adoption, and lack of information — that’s keeping crypto from growing into an asset class with scaled participation and support.
But why does institutionalization matter? Because institutionalization will result in positive growth, not just for the crypto ecosystem and its investors, but for markets and industries in general. Bigger players bringing bigger dollars with a more strategic approach to crypto asset investment can only improve market efficiency. More investment in crypto assets will also create more demand for more products and services catering to crypto assets. It will also encourage the adoption of regulations, legal standards, and transparency needed to hedge against information asymmetry and create fairness in the market. The institutionalization of crypto assets will also accelerate the adoption of crypto assets and blockchain technology, and the kind of possibilities they provide.
But we're not there yet.
Crypto is just passing the concept stage, where the possibilities and innovations it offers — like decentralized data transparency, peer-to-peer currency exchange, and smart, programmable contracts — have yet to be realized. But all technology starts off being misunderstood or out of reach at some point, and while crypto has passed the early adoption phase, it still hasn't gained the widespread trust, transparency, legitimacy, and awareness that will create that tipping point for future growth.
Here are five challenges preventing crypto from evolving into an institutionalized asset — and how to overcome them:
#1 Tech Improvements
Despite already utilizing blockchain technology, which itself is sophisticated, secure, and decentralized, the technology around crypto usage still needs improvement. Transaction speeds on the blockchain still lag significantly, high electricity costs remain a problem, as do high fees, and there are still scalability issues hindering widespread use.
These issues, however, aren't being left unaddressed. Solutions for scalability, faster transactions, and lower transaction fees, are being tested and adopted, like Ethereum’s second layer scaling, or Bitcoin’s Lightning Network options. As technology evolves, so will ease-of-use for crypto, which means more widespread adoption and greater awareness necessary for institutionalization.
#2 Defining Regulations
Cryptocurrency was created to be a decentralized network under the governance of protocols and community consensus — and knee-jerk regulation early on nearly ended crypto before it began. But as crypto has evolved into an appealing investment option, as more companies are issuing tokens to raise early-stage capital, and as there’s still uncertainty around how to categorize various crypto assets, there's a regulatory vacuum that needs to be filled.
For example, do investors have access to the information they need before they invest? What kind of disclosures do crypto start-ups need to provide — if any? Who or what are the security gatekeepers? Transparency and information asymmetry issues only lead to trust and parity issues, which can't sustain an ecosystem.
The good news is that there is a desire for more global standardization around disclosure, token issuance, and investment options, with governments and individuals working to make the ecosystem more fair. The more the culture evolves in rewarding detailed disclosures for the benefit of all — and punishing a lack of public information to the detriment of all — the easier it will be to grow crypto into a trusted asset class.
#3 Better Public Perception
While much of the general public may know the term "cryptocurrency," there's still the perception that it's for black market deals, and the general public may only see "Bitcoin" make the news when there's another hack demanding it as ransom. While anyone can do shady things with any currency, there are a number of incredibly positive benefits blockchain technology and cryptography can offer to the economy, industry, and society that most people don’t hear about.
The solution is more information, more new coverage, more implementation in everyday life, and more exposure to what crypto is and what it can offer the world. Public perception will change only through a normalization of the good, innovative ways crypto is adding to the world.
#4 Lack of Dedicated Services and Products
Crypto assets can’t simply stand alone. Any widely-adopted product must have a support network around it, and there's been a significant lack of financial services and products offering analysis, research, portfolio management, banking, and insurance. Institutionalized assets benefit from the financial services sector around it, which bring added legitimacy back to the asset.
We’re already starting to see this evolution, as investing and auditing firms are creating digital services and asset resources for their customers, and as banks are starting to develop their own currencies. These new products and services are not only creating opportunity for better crypto asset management, but greater awareness amongst investors and the general public alike.
#5 Reframe the Viewpoint
Crypto has only been in existence for over a decade, with investments in crypto assets only starting up a few years ago. One of the mindset roadblocks is expecting crypto to already perform like a long-standing institutionalized asset class. It can be easy to dismiss crypto as not being mature enough when it hasn't yet had the time to mature.
But crypto currency adoption and crypto asset utilization has come incredibly far in just a short time, having already survived creation, set-backs, early adoption, and early investment. Now, it’s just a matter of time until it earns the trust and legitimacy it needs to take its place among other well-established assets and move into its financial future.
Lihan Hyunwoo Lee
Co-founder of venture-backed startup Xangle — bringing disclosure and information aggregation services to crypto.