Ever since coins started to become really popular around the world, say, around 2015, there has been one group of people that have been very cautious to enter the fray – institutional investors. Many of them were very vocal about their dislike of digital currencies terming them either as fraud or a bubble about to burst. However, the trend has changed recently, and the institutional investors are poised to enter the coin markets in a huge way. As usual, big money brings with it a new layer of complexity to any industry, and it will be curious to see what happens in the coin-sphere with their entrance. (Investing In Coins: Watch These 5 Profitable Coins in 2018)
The maturing of the coin industry
When Satoshi Nakamoto first came up with BTC, he never thought it would become mainstream as it is today. Their idea was to create a decentralized currency that wasn’t supervised by any institution or individual. Fast forward 10 years since their whitepaper in 2008, BTC is acceptable as a legal tender in Japan and some places like Ohio accept tax returns in BTC too. The industry as a whole has grown to include more people. At first, it was only used by enthusiasts who were fascinated by the technology and concept. But there were some other dodgy users like terrorists and money launderers who were only attracted by the anonymity provided. All the same, there was very little demand for coins among mainstream industries. One of the earliest recorded transactions was back in 2010 when Laszlo Hanyecz, a BTC developer, bought two pizzas for 10,000 BTCs. Since then, a lot more companies have embraced BTC and other altcoins and accept them as actual currency. (Some of the: Alternative Coins beside BTC to invest in)
Growth of coin companies
And it’s not just the acceptance of coins by companies because even the coin platforms have also become more mainstream. One of the earliest coin platforms was Mt Gox and it was just created as a peer-t-peer coin platform without any oversight. Today, the top platforms are fully licensed to operate within the jurisdictions they operate and even report their earnings reports. As an example, Binance, one of the world’s biggest platforms and based in Japan, claimed that it was expecting net profits for the year 2018 to exceed $1 billion having already recorded $300 million in revenue in the first quarter of the year alone. (These are the: 5 Tips to Choosing the Ideal Coin Platform)
Many more major platforms are also reporting their earnings, and this shows they are growing and being considered more like actual financial services companies. The first crypt firm to enter the mainstream financial markets was Argo, a coin mining company that was listed on the London Stock Platform (LSE) on the 3rd of August 2018. Argo received a $61.2 million valuation (£47 million) and managed to raise $32.5 million (£25 million) after issuing 53.2% of its shares. Now an even bigger mining company, Bitmain, has revealed plans of an IPO as well on the Hong Kong Stock Platform. Others are attempting sneakier moves like Huobi did by acquiring a majority stake in an already listed company, Pantronics Holdings. Regardless of the strategy used, it is clear that coin companies have come out of the shadows, and it won’t be long before we see some coin platforms listed alongside major companies. (Do you know: Which Are The Most Influential Coin Markets By Country?)
Better coin regulations
Moreover, they require that each of their clients identify themselves. These policies are known as Know Your Customer (KYC) and Anti Money Laundering (AML). In order to be licensed by the local regulators, these AML/KYC policies had to be observed by the platforms to prevent any illegal activities. Most coin platforms nowadays require that their clients provide legal identification documents along with their actual pictures and physical address. The move made most transactions less anonymous as the individual involved in a transaction could be identified within the blockchain. While some may see this as a negative move against one of the pillars of coins, it has provided more confidence by regulators and governments in the system. (Some of the: Basic Coin Terms You Need To Know)
One industry to take advantage of this has been the insurance industry whereby several companies have specialized in providing insurance cover to coin companies. Among the challenges these coin companies have to face is hacking leading to massive losses. The most prominent scam involved the Mt Gox platform where 850,000 BTCs were stolen by hackers, losing clients $473 million at the time. These kinds of hacks are commonplace, affecting even the top platforms, and a need has risen to have coin assets insured against such attacks. One such service is CoinProtect, which is provided by PolicyPal Singapore and backed by global insurers. The cover protects users’ funds and private from hacks and other breaches. (What Would Happen To BTC Price When It Is All Mined?)
Thanks to these and other measures, more countries are also feeling more confident in treating coins like currency or even securities. Japan was the first country to legalize BTC, and remains to be the only one to date. Over in the US, coins are treated as securities and users ought to file for tax returns on any profits earned. Many other countries are considering various forms of regulation on coins to control their use once it became clear there was no way to completely ban their use. Toward the end of last year, BTC futures were approved and are now available on the CBoE, CME and Nasdaq platforms in the US. (Have you ever wondered: What Is The Future Of Coin In Finance?)
There were also plans to introduce BTC ETFs this year, but the SEC has rejected multiple requests. This was expected to be the biggest upset to the entire coin industry had it been approved, but the SEC had concerns about market manipulation and theft of assets. Although coin ought to be completely decentralized, this hasn’t been the case recently with some mining companies dominating the sector. These companies have the capacity to alter market prices as we saw recently when there was a fork in BTC Cash. Miners of BTC diverted their resources away from BTC and over to BTC Cash to win the ongoing hash war. Consequently, the value of BTC dropped significantly just because of their influence. It is this market dominance that has the SEC worried about approving the BTC ETF. (Ever asked yourself: How easy is it to trade Coin in the Forex market?)
However, some have argued that this kind of manipulation happens even on the stock market when some individuals make use of inside information to alter their trades on the open market. Furthermore, the manipulation by miners could be as a result of shallow liquidity in the markets, a problem that could be solved once the BTC ETFs introduce institutional investors. Finally, the request for a BTC ETF by VanEck SolidX BTC Trust addresses the problem of theft by purchasing the equivalent amount of BTC from the open market after a purchase to be used as insurance. The SEC is yet to give their ruling on this particular BTC ETF, but the signs are not positive. All the same, the fact that BTC ETFs are even being considered just 10 years after the coin was introduced is a major step forward. (After The BTC Cash Fork, Which Is The Real BTC?)
Major investors buying in
In the early days, only individual users would acquire BTC, again either for nefarious purposes or sheer fascination with the technology. But when individual investors realized that coin could actually be a good investment, they came in droves. Between November 2017 and January 2018, the total market capitalization of coin markets rose from about $180 billion to over $800 billion. Most of this investment had come from individual investors who were interested in riding the coin wave. (Gram (TON) Vs BTC in 2019: Best Worldwide Coin Fight, Pros and Cons)
One of the leading attractions of the coin market, and probably the most significant, was the booming ICO sector. In the first quarter of 2018 alone, the ICOs held during that time had managed to raise over $6 billion, more than the total raised throughout 2017. Again, these funds came from the pockets of individual investors who were interested in exciting projects. This is why even the SEC moved to regulate the ICO markets in the US and even issue warnings regarding scam ICOs, another sector that grew and tarnished the entire market. (Before you invest, check these: 5 tips to identify the perfect ICO to invest in)
Now there is a new breed of investor coming into the coin markets - institutional investors. These are the dreaded Wall Street firms like hedge funds and major banks. For a long time, these class of investor has stayed away from the coin markets because of the intense volatility, but now there are signs that these major investors are finally coming in. If this does happen in the near future, then the coin markets will have to adapt to their presence, and it would be interesting to see how.
Have institutional investors really invested in BTC?
The most important question to ask ourselves is whether this news really is true. After all, they have been the most vocal group to speak out against coins. Last year, the CEO of JPMorgan Chase said that BTC is ‘a fraud’ and ‘a worse bubble than the tulip bubble’ of the 1600s. He went further to claim that he would sack any of his employees who was found to be trading BTC. He wasn’t alone because other major banks’ bosses also echoed the same sentiment. Even payment providers like Visa were against crypto, when the CFO told Financial Times that Bitcoin and other coins were being used by naïve speculators.
As if that wasn’t enough criticism, famous investor Warren Buffett also discouraged investors from crypto. You would expect bankers to dislike any technology that diminishes their role in the financial system, but it the criticism goes beyond them. In his opinion, coins in general had no intrinsic value and that buyers were only depending on the ‘greater fool theory’. This theory basically means depending on someone else to come by and buy your asset as a higher price. Yet more investing gurus like Jim Cramer and speakers like Tony Robbins have compared crypto investing to gambling. (This is: Why Forex Trading Should Not To Be Treated Like A Casino)
The list goes on and on, with numerous speakers, experts and investors going against crypto investing. So, with so many people being anti-crypto investment, what evidence is there that they have been making investments in the sector? Well, the same people who were very vocal against are now starting to change their tune. Early in the year, Jamie Dimon who had called Bitcoin a fraud apologized for saying so. Instead, he said that one ought to look at each coin and ICO individually rather than dismiss all of them altogether. Moreover, the bank itself, JPMorgan Chase, released a report that claimed digital assets could represent a smart investment. The investment bank even partnered with the Royal Banks of Canada and Australia and the New Zealand Banking Group to create a platform for money transfer that would be faster and wouldn’t require 3rd party payment processors like Visa.
Several investment banks are also introducing a platform for their institutional clients to invest in cryptocurrencies too. One of the most significant was Fidelity Investments who created a separate company called Fidelity Digital Asset Services to handle trades for its institutional investors. Fidelity Investments already has over 13,000 institutional clients and handles billions in assets under management (AUM). Some of these funds and clients could begin to invest in cryptocurrencies now that there is a way for them to do so safely. Coinbase also created a trading desk specifically for institutional investors who bought a lot of coins at once, which is unavailable to individual traders. Then Binance, another major exchange, acquired Koi Trading to handle trades coming from financial institutions. (Ever wondered: How Did Tether Cryptocurrency Survive The Crypto Market Selloff?)
These and many other actions have increased the presence of institutional investors and sharks into the crypto market. The evidence was revealed in a report by Bloomberg in October, 2018 that indicated a lot of buying orders coming from institutional investors. Bloomberg spoke to a trading firm called Cumberland, which is a subsidiary of BRW Holdings LLC, about recent trading patterns. The head of Cumberland indicated that most of the trades worth $100,000 and above were requested by institutional investors. Previously, it had been high net-worth individuals who made these large investments, but they had panicked and left the market, leaving institutional investors to dominate. The statements from Cumberland echo a report by Grayscale Investments in July, 2018 that stated institutional investors were responsible for 56% of all their products. Along with institutions, other groups of investors included family offices (8%) and retirement accounts (16%).
Furthermore, these institutional investors were not going directly through the crypt exchanges, but rather going to the sellers directly. The biggest group of sellers are usually the miners, who get rewarded with new coins after they successfully hash a block. It is now becoming clear that these miners are selling directly to the institutional investors instead of selling their coins in the open market. This is nothing new, since we saw the same thing happening in the early days of the gold standard. Gold smelting companies later grew into banks after selling the metal directly from their shops. According to CoinMarketCap, trade volume from crypto exchanges was about $15 billion every day, while over-the-counter trades could range anywhere between $250 million and $30 billion a day. Clearly, the OTC markets are outdoing the exchanges in terms of trading volume, and most of this volume is thanks to the financial institutions. (Here is: Everything You Need To Know About Trading In Gold Markets)
Apparently, institutional investors prefer to buy coins OTC because they can set prices prior to the trade without the risk of price changes on the open market. Just think about what would happen if people heard a hedge fund was buying $1 billion worth of Bitcoin. Through OTC markets, they can quietly purchase the coins they need at the current market price and avoid the huge price changes that may cause slippage. Add to that, these coins by miners are completely new, which is something the investors may like. Being new to the blockchain, they have not gone through many ‘hands’ and are thus less likely to have been used for any criminal activity. For an investor, this is important in order to prevent any future run-ins with the law, should they happen. (Some of the: Bitcoin Price Prediction Update And Forecast For Autumn 2018)
From all the reports published by major news outlets and the companies that handle the trades, it is clear that institutional investors already are in the crypto markets. However, it is still safe to say that we have only seen the tip of the iceberg. These investors have billions to invest, yet the total market cap of coins has barely peaked above $200 billion. Therefore, we are just getting started and the really serious money may not be here yet.
What changed their minds?
It’s curious to find out what could have appealed to the sharks about crypto markets after they were so critical about the idea. And the most appealing factor has been the relative stabilization of market prices. Sure, the price of coins has been decreasing for most of the year, but the prices have also been stable unlike their behaviour last year. As an example, in December 2017, the price of Bitcoin rose from around $10,700 to a peak of $19,600 before ending the year at $13,500. Sudden peaks and rallies may excite individual investors because they appeal to the fear-of-missing-out (FOMO), but institutional investors favour gradual, predictable patterns. (Does BTC Stand A Chance To Becoming The Worldwide currency?)
Since June this year, the price of, say, Bitcoin, has remained within the $6,000 range up until November when there was a massive selloff across the markets. This is what the sharks like because they are able to avoid any huge losses even in a bear market. It only takes a glance at the S&P 500 price charts to see that there are very little fluctuations in price over time, and that makes the index very favourable.
Institutional investors are also having more trust in coins because of increased regulation. As mentioned earlier, most exchanges nowadays adhere to AML/KYC laws that limit criminal activity in the markets. Ass to that, coins are becoming more accepted as currency or at least as digital assets that can be regulated by financial regulators. Again, this gives people confidence that they are actually dealing with a viable product and not just hot air. Then there have been added measures to protect digital assets. Many of the companies that handle coins for institutional investors also provide insurance and store the coins in cold storage to avoid any hacks. (These are the: 5 Tips to Choosing the Ideal Cryptocurrency Exchange)
Although some governments and regulators initially opposed coins, there is a general acquiescence around the world that coins are here to stay. Now instead of fighting or banning coins, many regulators are looking for ways to regulate the market in order to make it safer for individuals. In the process, coins have gained more legitimacy, and they are no longer viewed as avenues for criminals and money launderers. The acceptance of Bitcoin and other coins as a means of payment by major companies also adds to the legitimacy of coins, and this also attracted the institutional investors. (Forex in USA: Myth or Reality?)
Approval of assets like Bitcoin futures were hugely beneficial as they created a new avenue of investment for institutional investors. These futures helped to assure investors of the future price of a coin as a safeguard against random price changes common in the market. Now Bitcoin ETFs are being considered, and gradually institutional investors have more ways of investing in crypto markets safely. Now there is even talk of Ethereum futures to mimic Bitcoin futures since the latter have done so well over the past year. If the trend continues, what’s to stop even more coins from getting their own futures on major futures exchanges around the world.
There is also the more obvious reason for their interest at this particular time – buying the dip. The fundamental strategy of investing is to buy low and sell high. At around $3,500 for Bitcoin at the moment of publishing, one could say that coins are currently at their lowest point and could go no lower. If one were to buy a lot of Bitcoin, for example, at current prices and the coin happened to return to its peak value of about $20,000, then that would be an enormous profit, especially if someone had a lot of the coin. This could also be the reason why these institutional investors are only now looking at cryptocurrencies after all this time. (These are the: 5 Most Popular Uses of BTC and other Coins)
And who doesn’t recognize the utility of blockchain? Multinational companies have to struggle with sending payment across borders, the costs incurred and the exchange rate fluctuations. Cryptocurrencies are not limited within borders, and they provide an efficient way of transferring funds around the world. Add to that, crypto is completely secure and private, so no one ever knows who sent how much. To this date, the blockchain has never been hacked, nor will it ever be because it is completely secure. This advantage provided by cryptocurrencies is so clear that even the most critical institutional investor cannot ignore it. Already many banks and international companies are using crypto to transfer money to their employees, and this is unlikely to stop any time soon. Besides, it’s never illegal as long as you report the monies to the appropriate regulators. (Bitcoin Cash Vs. Bitcoin: Confrontation Forecast in 2018)
When can you expect to see a change?
It is impossible to say for sure when exactly many of the sharks will start to redirect their money into crypto and away from traditional assets. Of course, it’s not as simple as buying a bunch of coins and storing them in a hard drive – that is the way of an individual. Financial companies like banks and hedge funds have long-term plans and assets that they cannot just simply abandon for a new asset class like crypto. It is more likely that they could only do so when they liquidate some of the assets they already hold if and when they start to become unprofitable.
Unfortunately, the global markets have been very positive this year with many stocks rising in value as can be seen from the S&P 500. For most of 2018, the S&P had been rising in value, indicating that US equities were performing really well and there would be no reason to liquidate those assets. There are even more alternative assets they could invest in like gold, oil, etc., so it is not likely that we shall see institutional money flowing to crypto soon. (All you need to know about: Trading stock indices)
However, we can still say, to a certain degree of certainty, that 2019 could be the year institutional investors make their foray into crypto. Forbes recently did a piece on this same topic, and they discussed some 6 reasons why 2019 would be the year for big money to trickle in. One of the reasons is that coins are not correlated to any other asset. Correlation is essential to consider when you want to diversify your portfolio because you don’t want two assets going down simultaneously. Instead, one is supposed to go up when another is going down, that way you can never experience huge losses. Looking at, say, equities and gold, the two are inversely correlated and you’re always balancing between the two. Coins are a completely new breed of assets because they are not correlated to any other asset, and they would be great to add to any portfolio. Now that there are fears the US equities market is in a downturn, institutions will be looking for alternatives like those in the crypto market. (Investor Tips 2019: What To Include In Your Portfolio)
All in all, we cannot say definitively when in 2019 we shall see the institutional money come to crypto, but this will probably happen around halfway through the year. Why so? Because the necessary infrastructure still isn’t ready to handle major investors. The coins themselves have to undergo various improvements to make them as efficient as possible, and then the institutional investors will also need specialized trading desks to handle huge orders. There is still also some uncertainty over some products like Bitcoin ETFs, and all eyes are still on the SEC to see what they decide to do. The approval of crypto ETFs on major exchanges will make investors believe in crypto and more money to flow into the markets.
What will be the impact of institutional investors?
The most obvious and anticipated impact of institutional money into crypto markets would be the rise in value for coins in general. As usual, increasing demand drives the price of a product higher, and big money usually means a lot of demand. Once institutional investors pour billions into crypto, the total market cap may eventually reach the much awaited $1 trillion market cap that was expected earlier in the year. This rise in prices will also motivate individual investors to re-invest their money in crypto, further driving prices higher. This year, crypto markets experienced a slump because investors panicked and sold off their coins when they say prices going down. This bearish sentiment has continued to prevail and it has been impossible for the markets to return to their former glory. Big money seen coming in would definitely change investors’ minds and make them come back. ICOs have also slowed down because of the same price slump, but we shall see more of them if more money is invested in the markets. (Will Cryptocurrencies Recover From Their Price Slump In 2018?)
Big money from institutional investors will also stabilize the price of coins. First, it will increase the liquidity of the markets when market capitalization is high. That way, individual traders and trades will not have as huge an impact as it would have before. This had been the case in a few of the dips in Bitcoin or Ethereum such as the one seen last week. On the 6th of December, the price of Ethereum fell from around $100 to $13 within minutes on the GDAX exchange. The crash was temporary, but it caused many traders to get stopped out and lose a lot of money. This crash, as many others before it, are often caused when a single large investor sells all their coins at once. On the 22nd of June 2017, Ethereum had crashed from $319 to $0.19 within seconds following a multi-million-dollar trade. Institutional investors don’t do this, which is why they have been quietly accumulating coins over the past few months.
Nevertheless, when there is enough liquidity after the big money is invested, these kinds of flash crashes will no longer be seen. Once the institutional investors start to apply some sophisticated tools like arbitration, this would prevent volatility even more. It has happened several times already that the price of the same coin has varied greatly from one region to another. For example, Bitcoin cost much more in China and Japan than the US because of higher demand, creating more volatility. Using arbitrage, these kinds of imbalances could be evened out to create a more stable market. (These are the: 10 Most Important Resources to a Cryptocurrency Trader)
Is there anything that could stop them?
It still isn’t given that the institutional investors the market so desperately needs will come into the crypto markets. So far, all we have seen is that there is increasing interest from them toward crypto, but nothing solid. There could still arise some discouraging factors to make them wary and once again appalled by the markets, and one of them is the dominance of a few players in the market. This was clear when the hash war between Bitcoin Cash and Bitcoin SV developers led to a massive selloff in all other coins. Because these developers have a lot of mining power, they can change the value of a coin by a huge margin simply by redirecting mining power to another coin. This is what happened to Bitcoin and Ethereum, leading to an overall selloff in the markets. Institutional investors would not want to be at the mercy of a few people, and as long as they still hold the power, this factor could put them off. (Do you know: What is An ICO and How Can I Make Money On It?)
Other disagreements between crypto developers could also drive away potential investors. As an example, Bitcoin suffered a lot during 2017 because there was never a clear agreement over how to solve the scalability problem in the network. Due to high demand and the 1MB threshold per block, transactions became slow to process and very expensive. Despite there being some potential solutions, developers disagreed, leading to several forks on the network. These kinds of disagreements make the crypto community seem disorganized and immature to handle billions and potentially trillions. For the sharks, they would rather stick to a tried and tested platform and not take unnecessary risks in a new venture. (Do you know: What Will Be The Impact Of A BTC Fork?)
Finally, regulations have been too slow to adapt the rapidly growing crypto market. So far, only Japan has completely legalized Bitcoin as a currency, while others are yet to do so. In fact, very few countries have passed any laws directly regarding cryptocurrencies, so the coins are still operating in a kind of wild, wild west. Until specific laws are passed by regulators, a lot of investors are going to be afraid of committing billions of dollars to the industry. Considering that, in the US, users had to file for taxes all proceeds gained from crypto trading, then it would seem that coins were indeed securities. Then earlier in the year, a federal judge ruled that they were actually commodities to be regulated by the CFTC. Perhaps this ruling helped pave the way for Bitcoin futures. Then again, there are no such laws in much of the rest of the world, still leaving some doubt about what coins are. (Learn more about: Cryptocurrency Regulations Around the World)
The good news is that there is no longer a question if when institution investors will start to invest in coins – they are already here. But they still haven’t done so wholeheartedly, and therein lies the problem. What could be said about this issue is that the crypto industry is still in its infancy, and there is still a lot of apprehension among investors. It will take some time before developers, regulators and investors get on the same page about how to treat coins in future. Until that is done, we will still continue to face uncertainty. Also consider the crypto community that would like to keep the regulators at bay, how would they feel if suddenly all their activities had to be supervised? Unfortunately, that is where we are headed, and it is the only way to get institutional investors to part with their billions, or else the industry fades into obscurity.
To get an idea how the debate is faring on, watch this video that brings to the table people from both sides: