Cryptocurrencies are feeling the pain of a bear market and multiple company collapses, but could the hidden strengths of decentralized technologies offer innovative opportunities for institutional investors or has the crypto winter iced them out?
2022 has been an extremely volatile market – with Bitcoin and Ethereum falling over 50 percent year-to-date. Retail investors are losing steam in a bear market, so one assumes the institutional sector will follow suit.
However, it seems that if we look to institutional investors like banks or private funds the appetite for crypto when the underlying fundamentals are right, remains. And it seems the sweet spot lies in DeFi.
ReDeFining investment mood: Why DeFi?
Decentralized finance, or DeFi, is one of the strongest examples of crypto's true potential, merging traditional banking and financial services with blockchain technology. DeFi supports financial services without a central authority, relying on smart contracts
leveraging the decentralized infrastructure of blockchains such as Ethereum.
This facilitates cheaper and faster financial transactions, any time, day or night. There is no minimum transaction amount and no paperwork, yet DeFi still offers full transparency and auditability to combat document forgery and digital identity fraud.
DeFi also opens up access to financial services to meet the needs of unbanked and underbanked businesses, with financial inclusion varying around the globe.
Replacing the traditional financial middleman with smart contracts creates opportunities for small and medium-sized businesses (SMBs), which wouldn't be serviced by a traditional lender – letting them access working capital without paying exorbitant rates
or giving up equity.
Unlike the Web2 platforms that dominate today’s internet usage, Web3 platforms are not built on the premise of making money when users hand over their data. If the end user isn’t seeing value in the platform, they can choose to disconnect completely, which
drives competition in the market.
DeFi also underpins decentralized exchanges operating without an intermediary. Thanks to the certainty and trustless nature of blockchains, tokenized assets traded through decentralized exchanges are never held in an escrow or a third-party wallet. This
also provides strong guarantees and increased transparency into the underlying mechanics of trading.
DeFi deal flow
In 2022 alone, the institutional sector has made some of its most notable investments.
In June, JPMorgan Chase’s Blockchain Unit announced plans to tokenize traditional finance assets and bring trillions of dollars into DeFi. JPMorgan Chase is initiating "Project Guardian", which trials institutionally-compatible DeFi via liquidity pools,
constituting tokenized deposits and bonds.
In April, $62 billion publicly traded fintech company FIS partnered with crypto infrastructure provider Fireblocks to offer its capital market clients full access to a suite of crypto services such as trading, DeFi and staking.
These are just a few recent examples of how institutional investors continue to see opportunities in a bear crypto market. They recognize that DeFi has the potential to shake up the status quo, democratize access and reshape financial services.
Most eagle-eyed institutional investors with an interest in decentralized technologies are hunting for DeFi projects with legitimate, real-world applications run by businesses with proven track records. While one would think a constricting economy would
drive most investors away, bear markets present an opportunity to back the next front runners of finance, while not buying in at the top of the market.
The market for Web3 technology is undeniable, and those who don’t move fast will be left behind. So much so that numerous companies are even launching the equivalent of their Web2 business models onto new blockchains in anticipation of this transition.
For instance, Crowdz’ Avalon Marketplace, built on Polygon, is another example of a DeFi venture designed to appeal to sophisticated investors. The company envisions the same Web2 model that
piqued the attention of investors in traditional markets (Crowdz raised over $25.5 million from VCs for its model that unlocks working capital for small businesses by allowing them to swap receivables for capital from a marketplace of investors) will serve
as an attractive investment for investors in a Web3 setting, along with the efficiencies that the Polygon Network brings.
Crypto might be in the grips of a bear market, and while it's inevitable we’ll hear more horror stories, opportunities still exist for institutional investors prepared to look at the big picture. DeFi highlights the true potential of crypto, and from what
we're seeing in market, it continues to be an attractive investment that many predict will pay off in the years ahead.