One of the predictions for 2019 was the entry of institutional investors into crypto, and this was well received. There were many reasons for this prediction, first, institutional investors hold a lot more capital than retail investors. Most institutional investors avoid herding, the practice where a majority of the investors sell or buy simultaneously creating huge bull and bearish runs. This is because most of them are long term investors and most importantly will increase the confidence that the general public has on crypto which can lead to wider adoption. But a recent report by Binance reveals that despite some high profile entries the prediction doesn’t seem to have materialized much. Also, the report goes into some peculiarity of crypto markets in general.
The report highlights that even many years after the inception of crypto, holdings of institutional investors in the industry is still very low compared to retail investors. This is more shocking if one looks at such breakdowns of equity markets, wherein the US most of the holdings are owned by institutional investors. According to the report, only 7 percent of crypto is owned by institutional investors, which is a very low number from what was previously thought of. In the report, the effect of such poor holdings of crypto by institutional investors on the market is also elaborated.
Another trend noted in the report is the correlation of prices among different cryptocurrencies, which seems baffling because in no way are they related. This correlation is explained by the presence of retail investors as they tend to trade on emotion and momentum. Second is the presence of HODLers who despite the bear market refuse to sell crypto, create a situation where the available supply of a coin is decreased to the current spot price. This also kind of creates a lower bound for the price of a cryptocurrency as HODLers refuse to sell.
There is a serious flaw in the report, as it seems that a lot of it is assumed. An extract from the report reads, “From data collected by cryptofundresearch.com, around 700 crypto funds operate…today, representing a total of just under $10 billion in assets… With a conservative assumption that they all hold solely Bitcoin, this would account for an upper bound of only 14% of the total market value of Bitcoin; If Altcoins are included in the assumption of their holdings… the ‘institutional proportion’ overall could be less than 7% for the crypto asset market”. Firstly, there could be private funds, also not all of the cash available with these funds can be taken as invested at any given point of time further diluting the accuracy of the report. And finally, institutional investors are more interested in projects and application more than current cryptocurrencies like JPM (JP Morgan) coin. Also, it was observed that at Davos, during the world economic forum, more and more people from traditional financial institutions are interested in blockchain technology rather than its applications. Also, many institutional investments have happened directly to crypto related projects and so fail to show up in crypto holdings, this doesn’t mean that these aren’t investments into crypto.
Despite the high returns, institutional investors seem to shy away from crypto due to many reasons, one of them being volatility. Institutional investors are answerable to shareholders and losing millions a day is not something that is going to go well with shareholders. Secondly, the lack of regulations and a clear vision. Lack of regulations affects institutional investors as they might be forced to pay a huge tax bill along the way. Also, there is no clear vision as to where the industry is headed, this creates a lot of uncertainty which these investors try to avoid at all cost.
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