How Institutional Investors Are Changing the Cryptocurrency Market
Institutional investors trading cryptocurrency gained ground in 2018, with a number of high profile players edging in and taking a seat at the table. Increased interest from larger investors may have played a part in supporting digital assets as well as distorting the market.
Will Crypto Markets Turn Bullish Again in 2019?
Last year, reports emerged that George Soros and the Rockefeller family were beginning to take positions in the emergent crypto asset class, according to Bloomberg. The family’s $26 billion Soros Fund Management was supposedly considering trading digital assets. The Rockefeller family’s VC arm, Venrock, decided to take a different approach by partnering with Coinfund to assist entrepreneurs in launching blockchain businesses.
Mike Novogratz, the chief executive officer of Galaxy Investment Partners, said he sees Q1 and Q2 2019 as a period when more institutions will start to come into crypto. He also expects the crypto markets to turn bullish again in 2019.
Crypto Is Not a Playground Anymore
Stefan Neagu, co-founder of digital identify management system Persona, said: “BTC attracted large players, as the institutional investors saw BTC as an investment instrument. This helped the crypto market because it was not a playground anymore, but rather the sandbox of a limited group of people with money from a real economy being shifted to the crypto market.”
In 2018, over-the-counter (OTC) market makers have thrived, with many institutional traders shifting to OTC. Etoro announced that it had opened an OTC platform for institutional buyers and Coinbase and Hodl Hodl launched OTC desks in November.
According to cryptocurrency research group Diar, institutional cryptocurrency trading on traditional exchanges has been diminishing in volume due to BTC being welcomed into major outfit portfolios this year. There has instead been a shift to OTC trading.
During OTC market hours, there has seen an increase in BTC trading volume by 20 percent, while Grayscale’s Bitcoin Investment Trust (GBTC) volumes were down 35 percent in 2017 vs. 2018 for the same period. It seems institutional traders might be shifting towards higher liquidity OTC physical BTC markets.Coinbase records more BTC trading volume than Grayscale’s Bitcoin Investment Trust (GBTC) on its OTC markets where the institutional cryptocurrency product is listed.
Liquidity Issues and Susceptibility to Manipulation
Another issue with the cryptocurrency market is low liquidity and its susceptibility to manipulation. The increased entry of institutional investors may have helped anchor the current market and distort prices.
Neagu said: “I doubt that this [increased institutional investor] interest will cause liquidity issues. I don’t see any reason why the crypto market should be different than the stock market. As for distorting the prices, I don’t think that they would see any big ripples.” He added: “Let’s remember that the Mt. Gox trustee sold $230 million worth of BTC in four months, and they did it using exchanges, not OTC desks. For the moment, the “weight” of these institutional players is not that big to send the BTC price down.”
Hong Kong Crypto Regulations Favor Institutional Investors
In Asia, Hong Kong’s Securities and Futures Commission (SFC) has introduced new rules which limit crypto trading to institutional investors. Licensed portfolio managers and funds that invest more than 10 percent of their portfolios in virtual assets are required to obtain a license which means only qualified institutional investors will be allowed to invest in virtual asset portfolios.
Roger Lim of Singapore-based NEO Global Capital (NGC) explains that crypto regulation in East Asia are still fragmented. However, further regulation will drive both governance and the mainstream adoption of cryptocurrencies.
Lim said: “As institutional investors, high net worth individuals, and family offices continue to monitor and take cryptocurrency seriously, and with regulators working to improve standards and guidelines for adoption, I expect that the market will mature in parallel. If the industry can continue to shift gears and direct its attention towards this narrative of growth, I think it’s very likely that we will see a comeback in 2019.”
Crypto Custody Issues Must Be Addressed
Cryptocurrency custody lies in safeguarding crypto assets. Scarcely a month goes by without an exchange hacking, funds being lost, stolen or compromised, with little hope or possibility of recovery. It is in the interest of any financial institution holding assets for another party to lower the risk of theft.
According to the Bank of New York Mellon, there is increasing demand in the market for a traditional, established custodian to provide custody of cryptocurrencies. There have been a number of firms launching services to secure assets and there have been reports of major banks testing and in some cases rolling out crypto custody solutions. Nomura and Intercontinental Exchange have announced plans, and sources state that other major banks such as J.P. Morgan, Goldman Sachs, and Bank of New York Mellon are exploring offerings. Introduction of custody would also unlock large amounts of capital, blogs Tom Shaughnessy, founder of 51percent Crypto Research.
Coinbase has received approval from New York regulators to form a custodial firm for cryptocurrencies. Previously, CEO Brian Armstrong has acknowledged this issue stating that there is $10 billion of institutional money waiting on the sidelines and that the number one issue preventing these individuals from getting involved is the lack of secure custodial services.
Will we see more institutional investors entering crypto in 2019? Let us know in the comments section below.
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