According to Custodia Bank CEO Caitlin Long, institutional investors from traditional finance lack the updated risk tolerance models to navigate the crypto landscape and may struggle during the next bear market.
“Big Finance is here in a significant way, and that seems to be marking this cycle. I believe it will continue to influence this cycle,” Long stated to CNBC at the Wyoming Blockchain Symposium on Friday.
Long noted that legacy financial institutions are accustomed to taking on substantial leverage, relying on built-in fail-safes like discount windows and other “fault tolerances.”
Long shares her insights at the Wyoming Blockchain Symposium. Source: CNBC
However, she cautioned that these advantages vanish in the realm of crypto, where transactions are settled in real-time. The CEO indicated that the divergence between crypto and legacy systems could lead to a liquidity crunch for these institutions:
“Those forms of fault tolerances stem from legacy systems that didn’t update in real-time. In crypto, everything must operate in real-time, and it’s an entirely different beast.
I do have concerns about how those financial titans will respond when the bear market returns. Some are optimistic and believe it may not happen again. Having been around since 2012, I am aware that it will return,” she added.
Institutional investors, particularly crypto treasury companies, have been a defining aspect of the current market cycle.
Some investors view this as a promising trend that propels adoption, while others warn that overleveraged and inexperienced companies might sell off crypto during the next bear market, leading to a contagion affecting the financial system.
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Custodia CEO echoes widely-held concerns of industry executives and analysts
“The greatest systemic risk moving forward is that you have one ecosystem managing risk and rebalancing in real-time, and another that takes weekends, nights, and holidays off,” said Chris Perkins, president of investment firm CoinFund.
This inconsistency in settlement methods can trigger liquidity problems, which are the foundation of all financial crises, Perkins conveyed to Cointelegraph.
In June, the venture capital firm Breed published a report stating that most new Bitcoin (BTC) treasury companies would not endure the upcoming market downturn.
The VC firm warned that overleveraged positions and declining asset prices will create a vicious cycle, compelling these treasury companies to liquidate their assets, further suppressing the crypto market.
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