Crypto: what's needed for institutional investors to really get on board

A "before" and an "after". All institutional investors are saying it: the arrival of ETF Bitcoin Spot in the US is a turning point for the cryptocurrency market. "A lot of banks and managers are feeling more comfortable with this type of product," points out Valentin François, portfolio manager at investment firm Arbevel.

Since January, dozens of banks and hedge funds have indeed taken advantage of the arrival of ETFs to position themselves. But is this the start of the "massive institutionalisation" so much vaunted by some? In reality, much is still missing. We take stock.

👉 Options and structured products

"Institutional investors" are not investors like any others. Whether they are banks, hedge funds or asset managers, their aim is to generate performance on the markets in order to make money for themselves and their clients.

This "performance" comes essentially from their trading activities. Except that institutional trading doesn't really resemble retail trading.

"No professional makes money over the long term by trading every day. That's the stuff you see on social networks, but it's fluff," sums up one professional trader.

In reality, institutional traders have medium-to-long-term approaches where the aim is to capture the price volatility of an asset. "We set a 3-month strategy with a range (higher and lower) of prices, and we use options to capture rises and falls in the price range," explains one banker.

Or while options are legion on traditional markets, they are much less so on the cryptocurrency side. "There are few options today and when there are, liquidity is still very limited," says Benjamin Deplus, an investor with the Breega fund.

This situation is obviously due to the "youth" of the market and things will gradually fall into place. Currently only a few crypto players such as the Deribit platform offer derivatives on Bitcoin and Ethereum.

Otherwise, it's more traditional players such as the Chicago Mercantile Exchange in the US or companies like CoinShares in Europe. "The cryptocurrency market is worth barely $2,000 billion when the bond market is worth $130,000 billion," points out Alexandre Baradez, head of market analysis at investment firm IG France. "Things will happen gradually", he adds.

👉 A crypto "Bloomberg Terminal"

While individual investors make extensive use of social networks and certain apps to invest, institutional investors need a "slightly more" sophisticated system. The star performer on the traditional markets is called Bloomberg.

In just a few decades, the American company has become a fixture on the financial landscape. "All our orders on the markets go through them," confirms a banker.

Besides orders, Bloomberg's famous "terminals" make it possible to set prices, define strategies and, above all, exchange directly with other market players, which is not yet possible in crypto. For its part, Bloomberg is only timidly advancing on the subject.

"Today, you will process all your investments via Bloomberg, except precisely cryptocurrencies," explains Valentin François.

Several players in the crypto universe have launched into the niche. The American Messari is trying to play this role, "but they are still a long way off, particularly in terms of data quality", points out a crypto investor.

Other companies such as the French company Kaiko, meanwhile, provide particularly reliable data, but access is nowhere near as easy as on Bloomberg. "If we want institutional investors to really get into cryptocurrencies, we're going to have to offer them a tool as effective as Bloomberg", Benjamin Deplus insists.

👉 More confidentiality

One of the other very important points is confidentiality. The aim of a hedge fund or a bank is to detect deviations and mean reversals on assets in order to position themselves on them before others.

The only problem is that by going through blockchains and portfolios, strategies can become transparent quite quickly. "Even if you divide your positions across lots of portfolios, it's possible to trace back the transactions and identify the holder of several portfolios," explains one banker.

Several protocols have obviously ventured into this niche. Their aim? To allow "large" portfolios to be seen only by other "large" portfolios on the network via a Know Your Business (KYB) system. Violet is one of the best-known applications on the subject, but these players are still very small.

👉 An activity that is still under-regulated

As in all areas that touch on crypto, the question of regulation is never far away. "Some activities are regulated, but not all," explains Valentin François.

"So you'll be able to buy an option from the CME, but you may find yourself blocked because of a bank that doesn't want to deal with a cryptocurrency custodian or exchange," adds an investor. Which obviously makes operations more complex. The arrival of the MiCA regulation should start to simplify things, even if the road is still likely to be a little long.