According to Custodia Bank CEO Caitlin Long, institutional investors from traditional finance lack modern risk tolerance frameworks for navigating the crypto space, which may lead to challenges in the next bear market.
“Big Finance is making a significant entry, and that appears to be steering this cycle. I believe it will continue to influence this cycle,” Long stated during her interview with CNBC at the Wyoming Blockchain Symposium on Friday.
She observed that traditional financial institutions are comfortable with high levels of leverage, thanks to built-in fail-safes such as discount windows and various “fault tolerances.”
However, she cautioned that these advantages vanish in the crypto space, where transactions are settled in real-time. The CEO highlighted that the dissonance between crypto transactions and legacy systems may lead to liquidity crises for these institutions:
“Such fault tolerances are entrenched in the system due to historical reasons, where systems did not update in real-time. In crypto, everything demands real-time responsiveness, and it’s simply a different scenario.
I worry about how these finance giants will respond when the bear market returns. While some hold an optimistic view that it won’t happen again, I’ve witnessed market cycles since 2012, so I anticipate its return,” she added.
Institutional investors, including those with crypto treasuries, have emerged as a significant aspect of the current market cycle.
Some investors perceive this as a favorable trend that propels adoption, while others caution that overleveraged and inexperienced firms may sell off crypto in the next bear market, leading to a contagion that could ripple through the financial landscape.
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Custodia CEO echoes prevalent concerns of industry leaders and analysts
“The foremost systemic risk in the future lies in the existence of one ecosystem that manages risk and rebalances in real-time contrasting with another that takes weekends, nights, and holidays off,” said Chris Perkins, president of investment firm CoinFund.
This inconsistency in settlement processes can lead to liquidity challenges, which are the root cause of many financial crises, Perkins pointed out to Cointelegraph.
In June, the venture capital firm Breed published a report asserting that most new Bitcoin (BTC) treasury companies were unlikely to endure the next market downturn.
The VC firm cautioned that excessive leveraging and decreasing asset prices could create a harmful cycle, compelling these treasury firms to offload their assets onto the market, which would further depress crypto prices.
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