Many concerns have been raised on the risks associated with Bitcoin storage. This is one of the reasons some institutional investors may be thinking twice about putting funds in the digital currency. News of losses of private keys, hacks of exchanges and scams are some of the issues that highlight the fact that cryptocurrencies, aside their volatility are fraught with even the more hazardous prospect of being stolen. This is why custodianship for bitcoins is gaining the attention of prospective investors.
It is obvious that institutional investors are far more cautious than individuals who have been the prime sustainers of the Bitcoin ecosystem. Their cautiousness is understandable in that their clients would not be impressed hearing that their fund was lost to a hack or loss of private keys.
Things are changing according to Kyle Samani, who is a partner at Multicoin. He said although custodianship and safety of coins have been a barrier to many institutional investors, in the course of the year, this challenge will become a thing of the past. The confidence institutional custodianship engenders will unlock the door to the inflow of capital into the coin market.
Samani said that his company, like many others is testing the Coinbase Inc. custodianship service among others. According to him, the focus is to find ways of securing these funds before adding them to their portfolios.
“Such projects would pave the way for vast tracts of investors to expand into cryptocurrencies, potentially reviving prices in markets that have tumbled in recent weeks.”
“Regulated cryptocurrency custody would allow more institutional buyers — such as hedge funds and pensions — to invest in bitcoin, ether and a multitude of other coins. Retail brokerages would have a safer way to let clients add crypto to portfolios stuffed with stocks and bonds,” he said.
Keeping clients funds with a qualified custodian is one of SEC’s requirements. Besides, it gives funds managers peace of mind knowing that client’s funds are secured. Custodians use cold storage among other measures to keep funds in their custody safe.
Cboe Global Markets Inc. and CME Group Inc. introduced Bitcoin futures six months ago giving institutional investors the opportunity of going short or long on Bitcoin. Owning Bitcoin synthetically gives this class of investors leverage to put in funds knowing that they do not have to worry about the safety of the assets.
However, when the Bitcoin futures started trading, the price of Bitcoin plummeted. It is not clear if the two events are correlated. What is certain is that there is a need and market for custodianship one way or the other. This is why companies such as BitGo have focused on this service for long even before Coinbase foray.
Speaking about the new custodianship project, Brian Armstrong, the Coinbase CEO said:
“Our goal with Coinbase Custody is to help dramatically accelerate the flow of institutional money into digital currencies over the coming years.”