According to Caitlin Long, CEO of Custodia Bank, institutional investors from traditional finance lack updated risk tolerance models to cope with cryptocurrencies, which may lead to difficulties during the next bear market.
"Large financial institutions are participating in significant ways, and this seems to be driving this cycle. I suspect it will continue to drive this cycle," Long told CNBC at a blockchain seminar in Wyoming on Friday.
Long stated that traditional financial institutions are accustomed to taking on significant leverage because the system has built-in safeguards, such as discount windows and other "fail-safe mechanisms."
However, she warned that these advantages disappear in cryptocurrency, as cryptocurrencies settle in real-time. The CEO noted that the mismatch between cryptocurrencies and traditional systems could create liquidity crunches for these institutions:
"I do worry about how these financial giants will react when the bear market inevitably comes again. I know some optimists believe the bear market won't return. I've been in this space since 2012, so I know it will come back," she added.
Institutional investors, including cryptocurrency treasury companies, have been a prominent feature of the current market cycle.
Some investors view this as a positive development for driving adoption, while others warn that over-leveraging and inexperienced companies will sell off cryptocurrencies during the next bear market, triggering a contagion effect throughout the financial system.
"The biggest systemic risk in the future is that you have one ecosystem managing risk and rebalancing in real-time, while another ecosystem takes breaks on weekends, at night, and during holidays," said Chris Perkins, president of investment firm CoinFund.
Perkins told Cointelegraph that this mismatch in settlement mechanisms could trigger liquidity issues, which are the root cause of all financial crises.
In June, venture capital (VC) firm Breed released a report stating that most new Bitcoin (BTC) treasury companies would not survive the next market downturn.
The venture firm warned that over-leveraging and lower asset prices would create a vicious cycle, forcing these treasury companies to sell assets in the market, further depressing the cryptocurrency market.
Related: Opinion: The insurance mechanisms for smart contracts are lagging, dragging down the entire industry
Original article: “Custodia Bank CEO Warns Traditional Financial Firms Will Face First Crypto Winter”
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