At its top in December 2017, the cryptocurrency market had a capitalization of over $800 billion, in so, stunning the traditional financial community. It may be a coincidence that the correction we’ve seen throughout 2018 began within the same month as the announcement regarding bitcoin futures. But because trading in futures made it easier for professional traders to participate in the cryptocurrency market, we might have an explanation for the drop in the crypto-universe.
In any case, if professionals have access to it, it seems only logical that the next step would be to see institutional investors piling in on all the fun too.
Who Are Institutional Investors?
An institutional investor is a bank, mutual fund, hedge fund, pension fund or insurance companies, to name a few examples. Or basically, these are entities with a ton of money to invest. In their search for ever higher yields, their primary task is to manage risk. The riskier the asset or the market, the more unlikely an institutional investor will enter it.
To compare, think of the traditional markets institutional investors place their money in: mostly bonds, real estate, and sometimes securities. When the bonds stop producing attractive yields, these guys switch to the stock market. And even such a move is considered far-far riskier than buying bonds.
So why on earth would such traditional investment vehicles turn their attention towards the cryptocurrency market?
Why Would Institutional Investors Join the Crypto Market?
The first thing that comes to mind is the vast growth potential. We may have seen a correction throughout 2018 so far, and the correction may continue further. But at the same time, the cryptocurrency market gained a lot of exposure and drew the attention of big investment houses. When there’s such a significant market capitalization and prices seem correct, institutional investors find it appealing to direct at least a small part of their funds into crypto assets.
The regulation doesn’t help, though. Most of the crypto universe doesn’t operate in a financially regulated environment.
For these institutions that are obliged to obey the law and act within legal frames, such a lack of regulation is an issue. However, signs from the United States, Switzerland, and South Korea point to the fact that an increasing number of countries and financial authorities are turning their attention towards the crypto market. As markets become more regulated and at a faster rate, the more funds it’ll attract from institutional investors.
Volatility is tempting big-money institutional investors that have speculative subsidiaries. Houses like Venrock (a venture capital investment firm tight to the Rockefeller family) in the United States is already investing in cryptocurrency projects. As more funds come to the market, the more liquidity there is, and that attracts even more institutional investors as fear of market manipulation are dispersed.
With more regulation, liquidity, and innovation, the cryptocurrency market will attract more and more funds in due course. Depending on the prices we’ll see in the future, some may decide that the market is just too attractive and that they simply cannot afford to miss out on all the innovation and growth potential.
We’ll find out soon what names poured their funds in and when, as well as the effect on the overall market volatility and its structure.