Has institutional money left crypto?

Key Takeaways

• Crypto prices have rebounded strongly this year, but the space remains barren compared to the pandemic hysteria
• Institutional money has fled at an alarming pace, and there is no guarantee it will return
• Scandals of 2022 were on such a large scale that capital is reluctant to return

Mention “2022” to anyone remotely involved in the cryptocurrency industry and you’ll likely send a shudder down their spine. The year was fraught with scandals, embarrassments and, more than anything else, thundering price collapses.

Bitcoin is a good gauge for the action of the industry. The world’s biggest crypto peaked at close to $69,000 in November 2021. One year later, it was $15,500. 

Since the nadir in November, prices have bounced strongly. Bitcoin is currently trading around $29,000, as softer inflation data and optimism around the future path of interest rates picked up since the winter. 

However, things are different. And despite these rising prices, there has to be a fear that the cryptocurrency industry has suffered an indelible blow to its reputation. For institutions, have the events of last year put a sour taste in the mouth?

Justin Chapman, Northern Trust’s head of digital assets and financial markets, summed up these concerns in an interview with CNBC this week, saying that “client interest has definitely gone off (a) cliff in terms of institutional interest in cryptocurrencies”

“It’s definitely quiet now, since 2022, from the institutional side,” he continued. “Before that, we were seeing traditional fund managers looking to launch crypto funds, ETPs in Europe, which is the equivalent of ETFs in the U.S. — that’s really gone quiet. Even the hedge funds, who are pretty active in the markets, have certainly reduced their exposure within that particular space.”

The evidence for this goes beyond anecdotes. I’ve put together a few reports on the immense capital flight out of crypto markets recently. One of my favourite charts to demonstrate the extent of this is by looking at the balance of stablecoins on exchanges. Since FTX collapsed in November, over half the total stablecoin balance has evaporated from exchanges. That translates to an outflow of $22 billion.

 Market depth on exchanges is similar: capital has just fled. 

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