Crypto Winter Warning: Will Institutions Weather the Storm?

Caitlin Long: Institutions Could Face Liquidity Crunch in Crypto Winter

Custodia Bank CEO Caitlin Long has cautioned that institutional investors new to the crypto space may struggle during the next bear market. Speaking at the Wyoming Blockchain Symposium, Long highlighted the potential for traditional finance's risk models to clash with the realities of crypto.

“Big Finance is here in a big way, and that seems to be driving this cycle. I suspect it will continue to drive this cycle,” Long stated, emphasizing the growing influence of institutions.

Legacy Systems vs. Real-Time Settlement

Long explained that legacy financial institutions rely on established fail-safes like discount windows and other “fault tolerances” due to systems not updating in real-time. However, these advantages disappear in crypto, where settlement occurs instantly.

“Those kinds of fault tolerances are built into the system because of legacy reasons, where systems were not updating in real-time. In crypto, everything has to be real-time, and it's just a different animal,” she said.

This mismatch could lead to a liquidity crunch for these institutions, Long warned, as their traditional risk management approaches are not suited for the volatile and fast-paced nature of crypto markets.

“I do worry how those titans of finance will react when the bear market inevitably comes again. I know some who are optimistic and think it won't come again. I've been around since 2012, so I know it's coming again,” Long added, drawing on her extensive experience in the crypto industry.

Echoes of Industry Concerns

Long's concerns echo those of other industry executives and analysts. The potential for overleveraged and inexperienced firms to dump crypto assets during a downturn, triggering a wider contagion, remains a significant worry.

Chris Perkins, president of CoinFund, previously stated: “The biggest systemic risk going forward is the fact that you have one ecosystem that manages risk and rebalances in real-time and another ecosystem that takes weekends, nights, and holidays off.” This mismatch between settlement mechanisms can lead to critical liquidity problems.

A Breed VC report in June suggested that most new Bitcoin (BTC) treasury companies would not survive the next market downturn due to overleveraging and declining asset prices, potentially leading to a “death spiral.”

Key Takeaways

• Custodia Bank CEO Caitlin Long warns of potential institutional failures during the next crypto bear market.
• Traditional finance risk models may not be adequate for crypto's real-time settlement and volatility.
• Industry experts share concerns about overleveraged firms triggering a market contagion.