Institutional investors will start to trade in cryptocurrencies, but the price crash last year has put a hold on their plans. That said, as David Mercer, CEO of LMAX Exchange, which owns the institutional crypto platform LMAX Digital, observes, “All the names you’d expect are looking seriously at crypto.”
LMAX Digital was launched into a bear market, something Mercer wryly suggests is something you wouldn't choose to do, but he remains optimistic in the long term. “We set up LMAX Digital purely for the institutional space, but at the moment it is probably at one-to-five percent of its potential – it remains largely retail-orientated,” he says. “If it remains this way then LMAX Digital will struggle, but we have a three-to-five year plan rather than a three-to-five months, so we just have to be patient.
“LMAX Digital was established at the request of institutional market participants and we have all the leading FX prop shops running crypto businesses waiting for the swathe of asset managers to enter the space,” he adds. “My belief certainly is that these firms will be trading digital assets in five years’ time.”
When asked what the catalyst will be for this expected surge in interest, Mercer is succinct, “Credit is going to be the key,” he says. “The reality is there is no concept of a prime brokerage network in crypto and that is why it interesting to see a bank like JP Morgan coming in with its own coin.
“At the moment LMAX Digital is seen as the trusted third party so people face us as the credit counterparty, whereas they wouldn’t – and I wouldn’t ask them to – in the fiat world,” he adds.
Unlocking the credit conundrum is key, and a big factor in Mercer welcoming the entry of banks into the crypto space. With the existing players in the space carrying balance sheets in the hundreds of millions of dollars, banks bringing bigger balance sheets to bear can have a serious impact, he believes. “When an asset manager can place their money with a top tier bank and trade on institutional exchanges like LMAX Digital, then we will have a market place,” he says. “Whilst you have to send your money to a Silicon Valley-backed bank you’re not going to see institutional players involved in the market place.”
Although Mercer believes the recent market stability in crypto assets hasn't been helpful for market growth, he does think it will be beneficial in the long term, “You can't have an efficient capital market that moves 5% every day,” he observes. “And as firms evolve their models for a less volatile market, they will find there is plenty of opportunity in crypto.
Watch the full video interview for more on this, as well as the similarities between the crypto space and the FX market of 20-30 years ago.