Institutional investors from the traditional finance world are stepping into the cryptocurrency space without updated risk tolerance models, potentially setting themselves up for trouble when the next bear market hits. This warning comes from Custodia Bank CEO Caitlin Long, who shared her insights at the Wyoming Blockchain Symposium.
“Big Finance is here in a big way, and that seems to be driving this cycle. I suspect it will continue to drive this cycle,” Long noted during an interview with CNBC at the symposium. She highlighted that legacy financial institutions are accustomed to leveraging large amounts due to built-in system fail-safes like discount windows and other “fault tolerances.”
Long shares her insights at the Wyoming Blockchain Symposium. Source: CNBC
However, Long cautioned that these advantages do not apply in the crypto world, where real-time settlement occurs. She expressed concerns that the mismatch between crypto and traditional systems could create a liquidity crunch for these institutions:
“Those kinds of fault tolerances are built into the system because of legacy reasons, where systems were not updating in real-time. In crypto, everything has to be real-time, and it’s just a different animal. I do worry how those titans of finance will react when the bear market inevitably comes again. I know some who are optimistic and think it won’t come again. I’ve been around since 2012, so I know it’s coming again,” she added.
The current market cycle is distinctly characterized by the active involvement of institutional investors, including crypto treasury companies. While some view this as a positive step towards broader adoption, others warn that overleveraged and inexperienced firms may exacerbate a future downturn by offloading significant crypto assets.
Custodia CEO Echoes Widely-Held Concerns of Industry Executives and Analysts
Chris Perkins, president of investment firm CoinFund, also emphasized the risks posed by the divergent settlement mechanisms. “The biggest systemic risk going forward is the fact that you have one ecosystem that manages risk and rebalances in real-time and another ecosystem that takes weekends, nights, and holidays off,” Perkins stated. He explained to Cointelegraph that this mismatch could trigger liquidity issues, often the root cause of financial crises.
In June, venture capital (VC) firm Breed released a report suggesting that most new Bitcoin (BTC) treasury companies may not withstand the next market downturn. The report highlighted that overleveraging and declining asset prices could create a vicious cycle, forcing these companies to liquidate their holdings, further depressing the crypto market.
For further reading, visit the source: Cointelegraph.
