Opening Cryptocurrency to Institutions with eToroX

Amid accelerating digital transformation and unprecedented global economic turmoil, more institutional investors than ever are queuing at the border of the new world of cryptoassets. However, despite the growing interest, lack of infrastructure is curbing the flow of institutional funds.

The eToroX crypto exchange provides a secure portal into cryptoassets for institutions, allowing sophisticated investors to access the market using the same familiar tools available in traditional financial houses. This includes advanced trade execution, portfolio management, and a compliant custody solution.

The cryptoasset opportunity

Beyond the frontier, cryptoassets offer enticing opportunities for institutions. Short-term traders can capitalize on unmatched volatility, and long-term investors have the potential for outsized returns like those that made bitcoin the best-performing asset of the last decade.

Bitcoin’s parabolic swings led the asset to register returns over 70 times higher than the average of five major stock indices between June 2015 and June 2020, according to data gathered by Buyshares. Moreover, Bitwise claims these returns came with “low correlation to virtually every other asset class”, making bitcoin a form of “digital gold” ideal for institutions seeking to balance their portfolios.

After initial skepticism, the biggest players of legacy finance have woken up to these benefits. JPMorgan conceded in a recent report that bitcoin showed more resilience than “traditional macro asset classes” in the crash of March 2020, and a survey from Fidelity showed a third of institutions are now invested in digital assets, with nearly half interested in investing in the next few years.

In the words of legendary investor Paul Tudor Jones, bitcoin has become “the fastest horse in the race to maximize profits.”

Barriers to entry: trading infrastructure

Based on our research, two of the biggest barriers to entry for institutional investors lie in custody and trading infrastructure.

Despite widespread recognition of the benefits of cryptoassets, the appetite of institutional investors is not accommodated by current market infrastructure. A March report from Acuiti found that “demand from clients outstripped the willingness of service providers to offer or expand coverage of digital assets, with only 52% of demand being met in North America.”

This is confirmed by a report from Aite, which found professional crypto traders to be in “desperate need of institutional-grade tools” to tackle a trading landscape of “increasingly fragmented liquidity.”

The general sentiment among industry leaders is that crypto has reached a tipping point: Institutions are willing to enter the space, but they need a secure venue that allows algorithmic trading and sophisticated risk management strategies to be applied to cryptocurrency.

Most digital asset exchanges today offer only basic order types and dated fee models. These leave big traders vulnerable to adverse market conditions, and prevent them from getting the best possible price. Without an institutional-grade API, institutions are also left unable to implement the sophisticated algorithmic strategies that now represent more than 60% of traditional markets.

Barriers to entry: custody and regulation

As Andreessen Horowitz venture capitalist Chris Dixon said last year, “custody is the single biggest piece of infrastructure holding back the growth” of cryptocurrency.

Large institutional investors are legally bound to hold their assets in safekeeping with a qualified custodian, but most custodians are insecure and unregulated. Losses from fraud, misappropriation of funds and exchange hacks amounted to over $4 billion in 2019, and few jurisdictions have yet laid out clear regulations to satisfy the institutional need for full compliance.

As one of only a handful of exchanges regulated with Gibraltar’s pioneering DLT license under the Investments and Financial Fiduciary Service Act, all custodial and exchange processes on eToroX are held to the same standard as traditional financial houses. Customer assets are custodied using a military-grade cold storage solution developed by the same cybersecurity experts protecting Israel’s strategic assets.

Providing institutions with cryptoasset trading infrastructure

2020 is a critical year for institutional adoption. eToroX is moving with the tide and adding more tools for professional traders who are looking to transition from the world of traditional finance to crypto.

Institutions can easily enter this ecosystem using eToro’s crypto exchange, which offers a secure fiat gateway provided by the regulated Signature Bank. This allows traders to enjoy real-time settlement with no transaction fees, 24 hours a day, seven days a week.

Advanced order types and a unique progressive inverted fee model give eToroX the same best execution focus as pioneering traditional exchanges. This taker-maker model has helped venues like Nasdaq BX to capture a quickly growing share of equities markets, and is ideally suited to the low levels of liquidity and wide spreads typically found in cryptocurrency. Furthermore, research from the University of Melbourne examined the few traditional exchanges that adopted inverted fee models, and concluded that the net impact of those models on market quality is positive, showing price efficiency and an increase in liquidity with inverted venue market share, with a decrease in short-term volatility.

Orders on eToroX can be routed via an institutional-grade FIX API, supporting the most sophisticated automated trading strategies with the ability to process up to 100,000 orders per second at a latency of under 100ms. With a regulated credit line, traders can tap into a deep pool of liquidity to boost trading power by up to 10 times the deposited collateral.

These tools allow the expert trading of all major cryptoassets, along with a range of stablecoins backed by the world’s largest fiat currencies and most-traded commodities, including silver and gold.

This puts traders on eToroX in the best possible position to move into the future of finance.

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