Bitcoin recently increased unexpectedly to $8000 from $5000 in a matter of weeks. One peculiar fact about trading during the rise was that the majority of this trading volume didn’t come from the spot market. Rather, it originated in the futures market, which depicts a fundamental shift in the case of crypto assets. Until now, this market was driven by retail customers on the spot market. If anything, this shift suggests that institutional investors are taking bigger chunks of the trade volume. This is something that analysts have been predicting for some time, and the entry of institutional investors is expected to fundamentally change the landscape of the market.
One of the biggest effects of institutional investors entering the crypto market is the influx of capital. This helps the industry in a number of ways, the most important being the fact that new projects can raise funds. Also, many existing projects will not have to shut down due to lack of funds as seen in the case of Ethereum Classic. Institutional investors usually look more into long term investments and this means that there will not be a sudden sell-off that is usually experienced in the industry. In fact, one of the reasons why many companies are hesitant to accept crypto is its inherent volatility, it makes pricing harder and filing tax returns a nightmare. Reduced volatility makes crypto more attractive to retail shops as well as small businesses. Once big banks and other financial institutions start trading and using crypto, it gives a new level of recognition and legitimacy for the technology. Even though news reports are constantly hit with headlines about crypto, up until now, crypto has been relatively at the fringes, at least in terms of the people who use it. Such recent events can bring better recognition among the public which will ultimately lead to wider acceptance. Another thing to note is that once banks get in, shops and businesses will start accepting it and slowly people will start making payments in crypto. This solves one of the biggest problems with crypto, which is where to spend it. Until now, crypto has mainly been used for speculation or by enthusiasts and not much of goods or services were traded using them. As mentioned before, the entry of institutional investors would lead to a change in this current state.
Institutional investors are really smart people. They have huge funds and have the means to swing the market in a way which maximizes their profit. The recent rise of Bitcoin to $8000 and the subsequent fall is assumed to be some of these players milking the market by manipulation. We could potentially see more of these as time goes by. Even in a heavily regulated market like equity, such investors are not hesitant to perform unfair practices, so it is natural that they show more of such behavior in an unregulated market like crypto. Another side effect of institutional investors is the call for more regulation. As more institutional investors pour in, they will want greater protection from the law. These can lead to a good number of regulations being placed on crypto. One has to keep in mind that these companies have the means to lobby governments all over the world to pass laws which they want. Another thing to mention is that if a lot of institutional investors lost money during a crash like the one which happened in 2017, governments will step in and alter the course of such regulations in a big way. Finally, if institutional investors are allowed to have their way, it defeats the purpose of crypto. It just ends up becoming like any other financial product, another centralized investment for big banks.
Institutional investors are more interested in the futures market and this can be seen from the data. According to the CME Group, the leading derivative market in the United States, 33,677 contracts were traded on May the 13th, amounting to 168,385 paper contracts. But there is always a catch, whether institutional investors decide to come into crypto or not, there will be consequences. Yet, as of now, it seems, at least in the short term, that the market is happy and welcoming of institutional investors. The community will have to be vigilant about how much influence to give to these investors and push back hard when the time comes.
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Disclaimer: The authors of this website may have invested in crypto currencies themselves. They are not financial advisors and only express their opinions. Anyone considering investing in crypto currencies should be well informed about these high-risk assets.
Trading with financial products, especially with CFDs involves a high level of risk and is therefore not suitable for security-conscious investors. CFDs are complex instruments and carry a high risk of losing money quickly through leverage. Be aware that most private Investors lose money, if they decide to trade CFDs. Any type of trading and speculation in financial products that can produce an unusually high return is also associated with increased risk to lose money. Note that past gains are no guarantee of positive results in the future.