This article is from our magazine Building Blocks. In this article, Chris Aruliah, Head of Banking Relations at Bitstamp, connects the dots between the institutional & retail markets and provides his thoughts on new investment behaviours and the changing landscape of finance.
Increased institutional presence creates opportunities to reach new retail segments
When it comes to adoption among retail investors, the ultimate stretch goal for those of us building the crypto industry is one day getting cryptocurrencies into the wallets of every single person in the world with an internet connection. That’s a very hard target to reach and, to stand any kind of chance of getting there, we’re going to have to make crypto just a click away for everyone. It’s not going to be possible for exchanges to do that directly, but we can do it by working in the background.
Lately, the discourse in our industry has been more about institutions entering the market than reaching new retail segments. But these two topics should go hand in hand. Increased institutional presence is not just about investments, it’s also about established and trusted players in traditional finance developing their own crypto services.
Retail adoption is already growing; however, to truly break into the mainstream, it will take a much larger network of exposure points. Currently, most people buy crypto at exchanges. That works well for pros and many segments of the retail market, which have at least some experience with investing their own capital. But if we’re looking at everyone in the world as our potential market, it’s more likely that the average customer will never buy his or her first bitcoins at an exchange.
Our current “average” retail customer is not a complete beginner when it comes to investing, but rather someone who has perhaps bought stocks or even gold before and wants to diversify. This kind of investor will already have enough experience and willpower to figure out how to use an exchange. To reach true mainstream adoption, however, we’re going to have to make crypto more accessible to people who may not even be sure what a broker does.
The reality is that it takes some effort to start trading at an exchange. The same way that it takes some effort to open a bank account. There are documents to submit and forms to complete. Because of the way exchanges are regulated, this barrier to entry isn’t going to disappear – which is a good thing. It’s part of our responsibility as businesses forming an emerging industry to educate regulators about crypto, and to work with them to create a regulatory environment that protects our customers. This is one of the processes by which our industry is maturing.
As venues for price discovery and the most direct link to the market, exchanges will always be the go-to place for professionals and those retail customers that are willing to do some research to get a better deal. The most basic and inexperienced retail investor, however, will probably never take the time to research trading fees or spread. These customers are much more likely to buy crypto if and when the option is placed right in front of them than deal with opening an account at an exchange, verifying their identity, and placing orders.
Exchanges, as well as other businesses with long-term interests in crypto, are constantly developing new best practices for the industry and it’s helped the entire space mature relatively quickly. Back in 2011 when Bitstamp opened its doors, it really was the Wild West out there. The crypto space has come a long way since then and is now starting to forge synergies with established industries.
We’re past the point where people doubt crypto is here to stay. In fact, it looks like blockchain technology is set to become a part of everyone’s lives in one way or another. Global tech leaders like Facebook, Microsoft, Samsung, Sony, Toyota, and Amazon AWS are already developing their own crypto solutions or working with existing cryptocurrencies. The wider financial industry may not be jumping onboard the whole way just yet, but it’s not that far behind. With Nasdaq opening bitcoin and Ethereum indices in early 2019, it seems to only be a matter of time before cryptocurrencies appear on the world’s biggest traditional exchanges. But that still won’t be the place where the majority of the world’s population buys their crypto.
Because no matter how much exchanges improve what we offer, the best user experience will always be not having to use a new app or service at all. The mainstream retail market is more likely to go to their bank versus coming to an exchange like Bitstamp. If we want to get crypto to everyone, we’re going to have to make it easier for inexperienced customers to access the crypto markets. Tech corporations are going to do that in some fashion, but Facebook’s Libra isn’t going to replace bitcoin. The two are very different propositions and, one could argue, different asset classes as well.
The landscape in finance is changing and it’s looking more and more like bitcoin may actually find its way into every digital pocket. By 2020, millennials are projected to become the dominant generation in terms of spending power. This generation’s views on investing have been largely defined by the financial crisis, which saw many traditional investment vehicles fail, including stocks and bonds that were thought to be safe investments.
This generation is looking for alternatives. They also happen to be the first generation of digital natives, having spent the majority of their lives with access to computers and the internet. Digital money that has a proven capacity to deliver a high return-on-investment is simply a great fit. In fact, 25% of all millennials are already engaged in the crypto markets and another 31% are considering doing so.
Perhaps a more interesting statistic, though, is that they would still rather get their non-traditional money from traditional institutions. In a survey conducted by Provoke Insights, 71% of millennials said they would invest in crypto if it were offered by traditional financial institutions. Of those that already invest, 93% percent said they would invest more. Progressive online banks have been offering crypto exposure for a while, relatively speaking. Now they are increasingly being joined by more traditional players. What bank doesn’t have an online platform and a mobile app these days? And who in the developed world doesn’t have a bank account?
The stage is already set for a level of accessibility that crypto exchanges aren’t able to match at the moment – at least not directly to the end user. The way we get there is by taking a step into the background. Because every bank with an online platform could very easily add crypto exposure to it. Not exactly trading, mind you, but exposure. How do we know? We are the ones providing the infrastructure that makes it possible. We call this Crypto-as-a-Service.
For a licensed financial institution like a bank, offering crypto exchange services compliantly is no small task. And banks are still just starting to embark on the journey of supporting and launching crypto services. However, more and more are seeing bitcoin and other major cryptocurrencies as a competitive advantage that can help them capture a larger share of the highly coveted millennial market. The crypto industry has matured to a point where we can provide them with the services they need to bring crypto exposure to their clients without ever touching the digital assets themselves.
The crypto exchange takes care of crypto custody and exchange services, so the bank doesn’t actually have to develop any new infrastructure. Instead of paying high overheads to set up a new system, they just connect to an API and add a few new buttons to their existing online platform to allow people to buy and sell crypto as part of a service they already use. There’s a little more operational complexity involved, of course, but that’s the gist of it.
The end user, in this case the bank’s client, our regular retail customer, gets to buy crypto from a web platform or mobile app that they already use and trust, without having to sign up or transfer funds to an exchange. They aren’t actually getting the crypto, they’re just getting exposure. They can buy and sell, but don’t own the underlying asset, don’t have the private keys and can’t transfer the crypto to another wallet. But that’s not really important to this investor, as it has been a smooth and simple experience, seamlessly integrated into their everyday life.
Some of these retail investors may become enthusiasts or even traders over time and move their crypto activity to an exchange. But the majority will only invest when the market sentiment is bullish and they probably won’t start using a new platform to do it. As an exchange, it’s a scenario we’ve catered to and planned for. A single trading venue can’t offer the best possible service to every type of customer. Only through partnering with others, and providing the infrastructure and liquidity that enables frictionless market access, can we bring crypto exposure to the mainstream.