Crypto is losing touch with institutional cash

Key Takeaways

• Crypto.com this week shut down its institutional exchange in the US, citing a lack of demand
• The regulatory climate has worsened significantly in the US, meaning crypto is becoming less practical for institutions 
• The macro picture and scandals across the space last year have also contributed, writes our Head of Research, Dan Ashmore

Two months ago, I put together a piece analysing institutional money and crypto. Specifically, it asked whether institutional cash had fled the industry. 

This weekend, we got the latest demonstration of quite how stark the exodus of institutional money has been. Crypto.com announced they were shutting down their institutional exchange in the US, blaming a lack of demand. While the retail platform will stay open, the institutional platform will no longer be operational. 

This is no surprise. Neither is the timing, as the announcement comes amid the increasingly hostile regulatory crackdown that is occurring in the US. Both Binance and Coinbase were sued by the SEC last week, with fears increasing that crypto will be pushed offshore. 

But while it is a key factor, the reasons for institutional cash jumping ship are not just limited to regulation. 

Macro environment

During the pandemic boom, we saw Tesla announce they were purchasing Bitcoin to hold on their balance sheet (before later selling most of that Bitcoin). We saw fund managers on TV seemingly daily, discussing the heightened demand from their clients to offer Bitcoin investment vehicles. A Bitcoin spot ETF was rumoured as imminent. 

Fast forward eighteen months, and things are slightly different. Despite a run-up of 55% this year, Bitcoin remains 60% off its peak as markets across the financial system have struggled. 

This follows a transition to tight monetary policy – the first regime of its kind during Bitcoin’s lifespan, which was launched in 2009 into what would become a decade of basement-level interest rates. 

The increasing interest rates have pushed institutions back on the risk curve. T-bills today offer 5%, a viable alternative, unlike the near-zero rate offered for most of the last fifteen years. This alternative and the syphoning of liquidity out of the system, with the hope of curtailing rampant inflation, has suppressed the price of all risk assets. The tech-heavy Nasdaq demonstrates this well, losing…