Challenges in Institutional Crypto Trading

In recent years, we have witnessed a surge in institutional interest in the cryptocurrency market – traditional financial companies and investment funds recognize the potential for diversification and returns in the digital asset sector. However, as institutional players enter the crypto trading space, they face many challenges, and the main of them are associated with liquidity, regulatory compliance, and cybersecurity. Indeed, there are some success stories in overcoming challenges – world-known companies such as Grayscale Investments and Fidelity Digital Assets made it to the top crypto institutional investors ever since. How to cope with challenges and reach success? Today, we’ll offer some efficient solutions to beginners companies in institutional crypto trading.

Liquidity Challenge

Institutional investors differ from retail traders in large volumes of trades. It requires sufficient liquidity to execute orders without significantly impacting prices in the market. The relatively young and fragmented nature of the crypto market poses a challenge, as it may lack the liquidity levels found in traditional financial markets.

Liquidity solutions for institutions:

• Over-the-counter (OTC) desks. OTC desks facilitate large trades out of the public exchanges, connecting institutional buyers and sellers directly. This method helps institutions execute large transactions without shaking the market.
• Smart order routing (SOR). SOR systems automatically divide large orders into smaller portions and route them to different exchanges or liquidity pools to achieve optimal execution. That is forwarding orders to the best exchanges out of all alternatives.

Regulatory Challenge

Institutional investors face a complex range of regulations when entering the crypto space. Regulatory clarity never stops developing, and compliance with existing financial laws can be challenging due to the decentralized and global nature of digital assets.

Regulatory compliance solutions:

• Due diligence. Institutions can conduct thorough due diligence on crypto assets and projects to ensure compliance with local regulations.
• Regulatory engagement and advocacy. Engaging with regulatory bodies and participating in industry advocacy groups can help institutions stay informed about regulatory developments.

Cybersecurity in Institutional Trading

Institutional players handling significant volumes of crypto assets often become targets for cyber threats. Security breaches can lead to financial losses and reputational damage. To protect their data and capital from hackers, institutions use specialized custody services. Custodians often provide insurance coverage against theft and hacking.

Regular third-party audits of the institution’s cybersecurity infrastructure are crucial.  It helps identify vulnerabilities and weaknesses, allowing for timely remediation and risk reduction.

As institutional involvement in crypto trading grows, the problems of liquidity, regulatory compliance, and cybersecurity come to the forefront. Even today, investors use efficient tools to cope with those challenges, protect their funds, and maintain their reputations. As the industry develops, there are going to be more solutions for liquidity, security, and regulatory issues.