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(Kitco News) – Institutional investment into the cryptocurrency sector has long been hyped as the thing that will bring legitimacy to the nascent asset class as the world’s largest financial institutions are expected to throw their weight behind digital assets as the next financial frontier.
2021 saw the rise of many popular market sectors that caught the eye of institutions – including decentralized finance (DeFi), nonfungible tokens (NFTs) and the Metaverse – but the widespread pullback for cryptos in 2022 has diminished the desire for firms to boost about their crypto involvement.
While the PR surrounding companies getting involved with blockchain has declined, the interest in the sector continues to grow at an astonishing rate, according to Tongtong Gong, COO and co-founder of the digital asset data firm Amberdata, who spoke with Kitco Crypto about the growing interest in blockchain technology by institutional investors.
Services offered by Amberdata include trading research, risk management, backtesting, accounting and compliance, which firms utilize to help make more informed decisions when it comes to investing in the blockchain space.
Multiple companies have reached out to Amberdata to utilize their services to gain a better understanding of the crypto markets and the different types of information available to them. This includes firms such as Citibank, Nasdaq and National Australia Bank, which are all current clients of Amberdata, according to Gong.
Proof of the increased demand for crypto data support can be found in the expansion of Amberdata, which has grown from a small 10-person team to a staff of 60 people in less than eight months.
“I would say 80% of my customers are all institutions and prop shops,” Gong said, highlighting the behind-the-scenes institutional demand that currently exists. “More than anything, even if a company decides not to get involved with crypto, they want to be smart about it and stay well informed of the latest developments.”
Information that is at the top of the list of importance for institutions includes a token’s fundamentals, such as its issuance rate, available supply, and consensus mechanism, along with different metrics that provide insight into the health of a network.
Areas of interest include decentralized finance (DeFi), stablecoins, smart contracts and interoperability, as well as a simplified way to view data from the hundreds of crypto exchanges located around the world to get a better understanding of available liquidity and potential arbitrage opportunities.
The rising prominence of derivative products like futures and options contracts has further complicated the information-gathering process, making it even more challenging to participate in the world of crypto.
Sectors of interest
One of the sectors attracting the most attention from institutional players is DeFi, which is introducing some “fun financial market primitives” such as lending and leverage trading.
The process of launching DeFi products is relatively simple when compared to the cumbersome process that is required in centralized finance (CeFi). DeFi is also globally accessible, while CeFi products are often only available in individual markets.
Another major selling point of DeFi protocols is that they don’t require a human to operate, thanks to smart contract technology.
According to Gong, CeFi institutions will likely start to incorporate DeFi offerings, such as lending and yield farming, in the near future as they attempt to offer users the best of both worlds while also trying to capitalize on all available income opportunities.
When it comes to NFTs, the underlying topic of discussion is digital rights management.
“When McDonald’s or Starbucks announces the launch of NFTs, in reality, it’s about digital rights management,” Gong said. “NFTs offer a way to capture digital rights annuities as a revenue stream, and for artists, they can continue to earn money as their product is being used.”
“So I think it solves a lot of problems, especially for the artist industry.”
The importance of data and DYOR
What’s most important for institutions to focus on moving forward is to “Know your data and do your own research,” Gong said.
While the main focus of discussions in 2019 centered around “is crypto just a fraud?” following the ICO hype cycle, this time around, “questions are more centered around how do we understand this better and how do we manage our risks better?”
Issues like available liquidity and counterparty risks are more of a priority than a fixation on fraud. More than anything, companies are looking to determine how they can avoid making the same mistakes again.
“Whether it’s Three Arrows Capital, Celsius or Luna, all the issues that have been seen are very similar to what has been experienced in the traditional markets, like with Long-Term Capital Management or Lehman Brothers. The entire financial industry is created based on risk management, and now, crypto is no different,” the COO said.
“Our mission is to provide the best, most comprehensive, and deepest insight and data for institutions to help make crypto more legitimate, mainstream, and here to stay.”
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.