Building in Bear Markets: Institutional Crypto Lessons in Volatility

Recent market volatility among digital assets–what many have dubbed the latest crypto winter–has forced industry players to look inward. And it’s revealed a number of serious structural deficiencies that can’t be ignored.

But conflating the crypto market’s performance with the exposure of those company- or asset-specific deficiencies loses sight of the wider, more enduring lessons that can be gleaned. Volatility provides both an opportunity to build and the ultimate test of integrity.

Cutting Through The Noise

Regulators today have a better understanding of how the market operates in practice, and why not all tokens claiming to be “stable”-coins are equally stable. Virtual Asset Service Providers (VASPs) see the benefits of segregating their clients’ crypto investments into separate vaults. Investors are better informed on what to look for in both an asset and an exchange. And the market’s resilience is tested in real-time.

We’ve witnessed a decade’s worth of market maturation unfold in a matter of months–and the digital asset ecosystem will emerge stronger because of it.

Downturns clean out the Pets.coms of the world, whose talking-sock-puppet ads (airing at the height of the dot-com bubble) endured long beyond the technology they touted. When markets are good, it’s easy to put the structural integrity of your business and products on the back-burner, and instead, focus on creating noise to break out of a crowded field. But noise not only distracts attention–it distracts investment and talent.

We’re building a different kind of legacy at Anchorage Digital, as are the long-sighted institutional clients we serve–institutions that see the merits of digital assets to reshape the future of finance.

Utilizing Bear Markets to Build

Long-sighted institutions–seeing that all businesses will one day be crypto-integrated–will utilize this period of market volatility to build out their own digital asset infrastructure and consumer products. Due to recent events, they can see now more than ever the advantages of doing so with regulated partners, whether regulated stablecoin issuers, lending platforms, or custodians.

DeFi can adapt TradFi’s playbook–the latter having endured many a bear market, and is battle-tested in its approach to looking inward to prepare for when the frost inevitably thaws.

Benefits of Building Crypto Products in Bear Markets:

• Proven structural integrity of business partners and assets
• Capital is allocated to the most enduring technologies
• Passionate partner teams dedicated to living out the life cycle of a product build
• Less exuberance = pragmatic decision-making
• Less trend-driven noise = focused development and team-building

When institutions take this route, they’ll be suited for the upswing. The crypto products they offer their clients will be best-in-class. And the assets they build infrastructure for will be forged by fire.

Integrity In Regulation

Volatility will continue to test the structural integrity of different digital assets and their service providers, and it will continue to shine a spotlight on new risks–and Anchorage Digital is better-positioned to help our partners withstand them.

Just last week, as heightened regulatory scrutiny around the bankruptcy risks incurred by “co-mingled” client investments and corporate funds, we rolled out an industry-first initiative that eliminates those risks by segregating funds into vaults. It was over two years in the making, meaning that we saw these risks (which we outlined in a “Learn With Anchorage Digital” primer) long before they were exposed by market volatility.

That’s the standard we hold ourselves to; Nathan and I are security engineers, so this kind of preemptive fortification is woven into Anchorage Digital’s DNA from its very founding. We’re trained to recognize threats before they emerge.

We saw that prudent planning repeated just a few days later, when some investors were shaken to find that their exchanges of choice had suspended withdrawals of their crypto deposits due to volatility–the type of unilateral decision-making that is prohibited under OCC regulation. And again, Anchorage Digital demonstrated a year and a half of foresight, having become the first operating federally-chartered digital asset bank in the United States in January of 2021. Even as crypto continued its upward trajectory, we chose to step out and help establish regulatory precedent where none yet existed, rather than waiting for that clarity to come to us.

We did so because we knew we were in crypto for the long haul, as were our clients. (History proves that institutions have the strongest diamond hands of all.) We also knew that regulatory oversight would compel us to focus on our own structural integrity–the same scrutiny that is now being applied across the industry.

Some might say Anchorage Digital is lucky to be ahead of the curve; but we know that advantage is by design. So as institutions look to make the most out of a bear market, there’s no better partner to build with than Anchorage Digital.