Crypto investors have long believed that institutional investors would cause subsequent Bitcoin moon event but this is often a false narrative built on nothing quite hope.
For the past two years, crypto-media outlets and Bitcoin (BTC) advocates have placed heavy emphasis on the necessity for institutional investors to embrace the cryptocurrency sector. The oft-stated belief was that institutional inflow would cause mass adoption and a fantastic spike within the value of crypto-assets as an entire .
Fast forward to this , and therefore the total cryptocurrency market capitalisation has yet to succeed in the $750 billion all-time high seen in late 2017.
The slow recovery of crypto prices raises a couple of hard to answer questions. If institutional funds are flowing into cryptocurrencies, why hasn’t there been a big increase over the last three years?
Either there’s an almost infinite sell pressure — which shouldn’t be a barrier considering the entire crypto market cap is simply $248 billion — or this theory that institutional investment will pump crypto prices doesn’t hold. Here are three reasons why institutional investors have yet to hitch the crypto market.
The on-ramp remains too steep
Investing in Bitcoin, the highest listed crypto asset on CoinMarketCap, remains a big hurdle for giant open-end fund managers, especially when considering their perceived risk of Bitcoin.
Add to this the extra purchasing steps necessary, compared to more traditional assets, and therefore the process of just buying crypto is off-putting. Some funds’ internal regulation also doesn’t allow investments of specific products, while others are ousted by the low liquidity in regulated and approved venues.
Presence doesn’t equal profit or guarantee a market
The arrival or presence of institutional investors does necessarily translate into buying pressure. Renaissance Technologies Medallion Funds’s recent entry into CME’s Bitcoin futures markets may be a perfect example.
Furthermore, it should be noted that since CME futures are cash-settled, they don’t necessarily involve any Bitcoin trading activity. More importantly, a hedge fund also can open short positions.
Investors should wonder: Why should they celebrate a $10-billion fund potentially entering the space looking to bet against Bitcoin’s price?
Yes, there has been significant growth within the crypto derivatives market, and these are preferred instruments among institutional-size investors, but they continue to be incredibly complex for the typical retail investor.
Building positions via futures might are available at a high cost, as contracts expire every two months. Furthermore, this is able to mean investors would combat the danger of trading at a negative premium to the commodity exchange , as there’s usually a price involved in switching to subsequent expiry.
Simply put, futures contracts aren’t designed for long-term holding.
Compared to traditional markets, the crypto sector is just too small
While Bitcoin does produce amazing returns, there are other reasons why a $94-trillion industry won’t just blindly buy cryptocurrencies anytime soon.
Cryptocurrency market cap in perspective. Source: BitcoinIRA
No matter what percentage times one has seen the chart above, it remains pretty impressive. The crypto sector’s $248 billion market cap is simply a speck among capital markets. Currently, Japanese yen banknotes in circulation amount to $1 trillion, and this doesn’t include bank deposits nor treasuries.
The world’s 20 largest asset managers combined oversee $42.3 trillion. A mere 0.5% investment in cryptocurrencies would find yourself at $211 billion — like 84% of the entire market cap.
Even though the past few years have shown that crypto can provide an infinite upside, one must concede cryptocurrencies aren’t even on the brink of being at an equivalent playing field as traditional markets. Grayscale Investments manages $3 billion, the most important available publicly-traded vehicle for institutional investment in cryptocurrencies.
Despite such a big amount, it remains insignificant within the eyes of the world’s largest money managers.
Banks, credit cards, insurance and brokerage companies represent a big portion of the portfolio for nearly every large asset manager. BlackRock, State Street, Vanguard, Fidelity and Wellington consistently feature because the top 20 holders of monetary stocks.
Banks are a relevant player during this field as HSBC, JP Morgan, Goldman Sachs, Deutsche Bank, BNP Paribas, UBS and Wells Fargo figure among the world’s largest mutual funds managers.
This relationship goes deeper as banks are relevant investors and distributors of such independent mutual funds. This entanglement goes even further as large financial industry players dominate equities and debt offerings, coordinating investment funds’ allocation in such deals.
There’s not much room to be gained for any open-end fund manager to take a seat at the incorrect side of the table when the topic is that the traditional finance industry.
At the instant , cryptocurrencies are in no way a threat to Visa, Wells Fargo, Chubb or Charles Schwab. It doesn’t matter how well decentralized finance is performing or how sizable Bitcoin transactions are immediately .
Therefore, the question investors should be asking is: what’s preventing institutions from engaging, and what wouldn’t it fancy get them to take a position in cryptocurrencies?
Regulatory pressure remains a hurdle
Former Commodity Futures Trading Commission Chairman J. Christopher Giancarlo admitted in October 2019 that his agency deliberated with the Treasury, the us Securities Exchange Commission and therefore the National Economic Council to suppress Bitcoin’s incredible 2017 rally.
This government-backed plan culminated in December 2017 as CME and CBOE both listed Bitcoin futures contracts — at some point after Bitcoin’s famous $19,700 top.
In May 2019, U.S. member of congress Brad Sherman called on colleagues to outlaw cryptocurrencies. President Donald Trump tweeted back in July 2019:
“I am not a lover of Bitcoin and other Cryptocurrencies, which aren’t money, and whose value is very volatile and supported nothingness .”
More recently, the U.S. Secretary of the Treasury Steven Mnuchin promised “significant new requirements” on cryptocurrencies.
In October 2019, U.S. senators went as far as sending out a letter to 3 companies backing Facebook’s Libra cryptocurrency project, citing “risks the project poses to consumers, regulated financial institutions, and therefore the global economic system .”
Despite Bitcoin not being widely considered a competitor to paper money , it’s almost sure that it might be if the cryptocurrency achieved a trillion-dollar market cap.
Liquidity and simple access
BAKKT features a product designed to ease mutual funds’ significant barrier to Bitcoin investment. Bitcoin futures contracts with physical delivery allow purchases throughout a completely regulated venue, including the custody process.
As reported by Cointelegraph, BAKKT is controlled by the Intercontinental Exchange, the owner of the ny stock market . Clients willing to trade such products must roll in the hay through the regular brokers used for stocks and futures.
For ages, retail investors awaited BAKKT’s launch, as its arrival was prophesied to be a sign that the crypto sector had received the blessing of institutional investors. Estimates of a replacement all-time high being reached in 2018 and 2019 were relentless and more often than not, wrong.
After launch, what appeared like an ideal solution produced a mean daily volume, which to the present date, remains irrelevant. There are numerous reasons this might be taking place:
- Few brokers currently offer BAKKT’s products.
- Many funds’ internal regulations don’t allow the ownership of physical Bitcoin-based investments.
- Additional bureaucracy (controls) is required for funds to be approved by BAKKT.
- Physical Bitcoin not accepted as margin for leverage trading.
- Limited Sunday to Friday 8:00 p.m. to 6:00 p.m. trading hours.
Although internal fund regulations are often changed to accommodate Bitcoin investing, it’d not make much sense immediately for multi-billion-dollar investment .
Analysts and portfolio managers proposing the addition of a replacement asset class in secular open-end fund managers would be taking an immense personal risk.
Crypto can and can scale without institutions
The intention of this piece isn’t to show away investors from Bitcoin and cryptocurrencies. Pundits and analysts with no real market experience have promised impossible scenarios for much too long. If the Bitcoin market cap remains under $1 trillion, rest assured you’ve arrived early to the party, and that’s not necessarily an honest thing.
There is possibly a vast upside for this asset class, and institutional investors’ entrance will almost certainly happen gradually, then suddenly. Right now, it’s essential to understand that a multi-trillion-dollar open-end fund industry hasn’t got strong enough reasons to take a position in such a nascent asset class.
Crypto doesn’t need the mutual funds industry; it’s the opposite way around. Bitcoin is money for normal people and an investment by itself.