Institutional demand for Bitcoin and Ethereum increased their prices over 170% and 110% in Q4 2020 respectively, driving FalconX’s monthly volume above $3 billion. Recently, we had the opportunity to talk with one of our investors, Ian Lee, Managing Director of IDEO CoLab Ventures, about how the crypto market is evolving and what audiences are contributing to its next wave of growth.
Ian has the best vantage point to speak on the subject of cryptocurrency users. Before IDEO, he was a Director at Citi Ventures, Citigroup’s venture arm, where he led Citi’s network of R&D Labs, an early-stage R&D fund, and blockchain. IDEO is a leading design studio along with their venture capital fund, IDEO CoLab Ventures — focused on human-centered products. IDEO CoLab Ventures is active in the cryptocurrency space, specifically in DeFi, and is uniquely positioned to identify user personas and behavior. We’re excited to share this discussion with Ian in the FalconX podcast. To listen to the full conversation, check out the episode included below.
Today’s crypto users: Who are they?
Early adopters fueled the initial growth and excitement in the market. While the total addressable market is greater than $3 trillion, cryptocurrency technology is still maturing prior to the mass adoption that many expect will reach the next wave of users.
Early institutional market participants formed cryptocurrency focused organizations to capitalize on the opportunity to achieve greater alpha trading and investing in the nascent asset class. These investments include crypto focused hedge funds, algorithmic trading firms, and venture capital funds, which have since grown significantly over the last 12 months. As a result, many of the tools and services built in 2020 focused on servicing these crypto focused institutions. New settlement tools were launched and blockchain infrastructure emerged to increase speed of transactions and support various decentralized finance applications.
What is most notable about the past year is the diversification from crypto native institutions in early 2020 to new institutions entering this space at the end of last year into early 2021. From March 2020 through December 2020, FalconX saw crypto-native institutional volumes move from 92% to less than 70% — driven by new, non-cryptocurrency native, institutions.
Next: Crypto’s Emerging Users
FalconX is providing institutional clientele a one stop shop for cryptocurrency trading, credit, and clearing. From our work with customers, we are seeing emerging institutional players, including:
- Large traditional hedge funds, allocating to Bitcoin as a macroeconomic hedge
- 401K and IRA providers, IRA allocators
- Traditional enterprises leveraging cryptocurrency as a cross border payment mechanism — lowering the cost and time of B2B payments
- Payment providers and international remittance companies
These sophisticated investors, with a large focus on compliance and customer service, demand a new set of tools and services to best service their needs. This group is further institutionalizing the market and paving the way for other similar market participants.
Beyond Institutional Adoption: Who needs cryptocurrency the most today?
Outside of the institutional user group, IDEO has expanded its focus on the potential of crypto to developing and emerging markets (where financial monetary systems are more prone to collapse or are underdeveloped) as well as the underbanked community.
As Ian explains, these communities exist even in developed markets such as the United States today, where individual digital entrepreneurs and creators (sole proprietors making a living off of their talent) do not have tailored financial infrastructure to fit their needs. With roughly 20 million people unemployed in the U.S, Ian expects platforms servicing this segment to grow in today’s virtual and remote environment. Another sub-category within the underbanked community consist of freelancers; people who do not work for a single company throughout their career and are unable to build equity, accumulate wealth, and savings over time. In both underbanked communities and developing and emerging markets, Ian explains how the traditional financial system of today does not solve these obstacles. He highlights that decentralized blockchain infrastructure relying on digital methods of transacting and storing assets, may be the next wave of more mainstream users that lead this industry into mass adoption.