Cryptocurrencies are feeling the pain of a bear market and multiple corporate collapses, but could the hidden strengths of decentralized technologies offer innovative opportunities for institutional investors, or has the crypto winter frozen them?
2022 has been an extremely volatile market – Bitcoin and Ethereum are down over 50 percent year-to-date. Retail investors lose momentum in a bear market, so it’s likely that the institutional sector will follow suit.
However, it seems that if we look at institutional investors such as banks or private funds, if the underlying fundamentals are right, the appetite for crypto remains. And it seems that the sweet spot is in DeFi.
Redefining Investment Sentiment: Why DeFi?
Decentralized Finance or DeFi is one of the strongest examples of crypto’s true potential, fusing traditional banking and financial services with blockchain technology. DeFi supports financial services without a central authority and relies on smart contracts that leverage the decentralized infrastructure of blockchains like Ethereum.
This allows for cheaper and faster financial transactions at any time of the day or night. There is no minimum transaction amount and no paperwork, but DeFi still offers full transparency and auditability to fight document forgery and digital identity fraud.
DeFi is also opening up access to financial services to meet the needs of unbanked and unbanked businesses, with financial inclusion varying around the world.
Replacing the traditional financial intermediary with smart contracts creates opportunities for small and medium-sized enterprises (SMEs) that would not be served by a traditional lender – by gaining access to working capital without paying exorbitant interest 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 submit their data. If the end-user sees no value in the platform, they may choose to disconnect entirely, which drives competition in the market.
DeFi also supports decentralized exchanges that work without intermediaries. Thanks to the certainty and lack of trust of blockchains, tokenized assets traded through decentralized exchanges are never held in a third-party escrow or wallet. This also offers strong guarantees and increased transparency into the underlying trading mechanisms.
DeFi deal flow
In 2022 alone, the institutional sector made some of its most notable investments.
In June, JPMorgan Chase’s blockchain unit announced plans to tokenize traditional financial assets and inject trillions of dollars into DeFi. JPMorgan Chase is initiating “Project Guardian” testing institutionally compatible DeFi via liquidity pools representing tokenized deposits and bonds.
In April, publicly traded fintech FIS partnered with crypto infrastructure provider Fireblocks in a deal worth $62 billion to offer its capital markets clients full access to a range of crypto services including trading, DeFi and staking.
These are just a few recent examples of how institutional investors continue to see opportunity in a bear crypto market. They recognize that DeFi has the potential to disrupt the status quo, democratize access and reshape financial services.
Most perceptive institutional investors interested in decentralized technologies look for DeFi projects with legitimate, real-world applications run by companies with a proven track record. While one might think that a restrictive economy would drive most investors away, bear markets offer an opportunity to support the financial industry’s next frontrunners without buying into 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 rolling out the equivalent of their Web2 business models on new blockchains in anticipation of this transition.
For example, Crowdz’s Avalon Marketplace, built on top of Polygon, is another example of a DeFi company aiming to appeal to sophisticated investors. The company envisions the same Web2 model that has caught the attention of investors in traditional markets (Crowdz raised over $25.5 million from VCs for its model, which frees up working capital for small businesses by enabling them to exchange claims for capital from a marketplace of investors). as an attractive investment for investors in a Web3 environment, together with the efficiencies that the Polygon network brings.
Crypto could be engulfed in a bear market, and while it’s inevitable that we’ll hear more horror stories, there are still opportunities for institutional investors willing to look at the bigger picture. DeFi highlights the true potential of crypto, and from what we’re seeing in the market, it continues to be an attractive investment that many predict will pay off in the years to come.
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