January 11, 2022 | Stamford, CT — Digital asset market structure, which was built primarily to meet the needs of retail and high-net-worth investors, is coming under the increased influence of institutional investors. 

Popular digital asset platforms were initially developed to support an audience of retail, high-net-worth, venture capital, family office, and crypto-native investors to buy and hold Bitcoin and other digital assets directly. However, as traditional institutional investors, fund companies, custodians and banks become active in digital assets, the market structure is evolving to accommodate their needs and preferences. 

The market is shifting from spot trading and physical ownership (e.g., holding Bitcoin) to both physical and financial instrument ownership with the market adopting traditional financial products like digital asset securities, futures, options and exchange-traded funds and products. Data from Coalition Greenwich data shows exchange-traded funds/products are favored by 61% of buy-side institutions, versus 27% for direct physical ownership.

Moreover, as liquidity-seeking evolves from request-for-quote (RFQ) to streaming prices and order books, fully decentralized exchanges have also emerged to offer new models and competition to exchanges, broker-dealers and alternative trading systems (ATSs).

“There are a seemingly countless number of firms moving in to fill the gaps for institutional trading of digital assets, such as trading platforms, prime services, market making, surveillance, analytics, custody, and settlement,” says David Easthope, Senior Analyst for Coalition Greenwich Market Structure & Technology and author of Digital Asset Market Structure: Institutions Take the Reins.

Going forward, the development of the digital asset market structure will be affected by the challenger for traditional institutions to hold spot crypto due its nature as a bearer instrument (making custody and security a challenge), as well as onerous capital requirements for banks. 

“This next phase in the evolution of crypto market structure will be highly dependent on how market participants approach the breadth of digital assets, and how regulators balance investor protection and ensure market integrity, while also supporting technology innovation and the growth of deep and liquid markets,” says David Easthope.