A familiar face is back in the cryptocurrency ecosystem. Enticed by the prospect of quick profits in a rapidly appreciating asset class, retail investors are returning for a second innings to the crypto ecosystem. The 2017 bull run in crypto markets was largely powered by retail investors. At that time, their entry helped bump Bitcoin (BTCUSD) into mainstream consciousness and spiked its price volatility. But the circumstances this time around may be different.

Key Takeaways

  • Retail investors, who powered the first bull run in cryptocurrencies, are making a comeback into the ecosystem.
  • Unlike last time, when they exited after booking profits, retail investors might be into crypto for the long haul this time around.

More Users and Trading Volumes

Following a price coma that lasted more than two years, Bitcoin has become a popular investment tool with mainstream investors thanks to digital platforms. Google searches for Bitcoin have reached crypto mania levels, and trending Twitter topics have helped highlight price surges for the cryptocurrency. eToro, a crypto trading platform, reported the addition of 200,000 new users in the first week of this year.

Out of that figure, the company stated that it had 61% and 49% more unique Bitcoin and Ether (ETHUSD) holders as compared to last year. Not surprisingly, trading volumes at the Israel-based firm jumped by 10 times as compared to the same period from last year.

In the United States, several prominent exchanges such as Coinbase and Kraken suffered outages due to a surge of interest, some of it presumably from new users, in cryptocurrency trading at their venues. Revolut, a U.K.-based banking and trading app, witnessed an influx of 300,000 new crypto customers in the past month. Meanwhile, online payments company PayPal Holdings, Inc. (PYPL), which launched crypto facilities for its users last year, is also reported to have cleared $242 million of crypto sales—a record—in one day recently.

Another Repeat of 2017?

Some commentators are referring to the entry of retail investors and PayPal numbers as a sign of mainstream adoption for cryptocurrencies. But that might be a stretch. Retail investors and traders exited crypto markets after booking profits during the previous bull run. They might do the same this time as well. The pseudonymous nature of Bitcoin transactions, in which real identities are obscured by crypto addresses that may or may not belong to the same entity, also means that analysts should leaven their assessment of crypto figures with a healthy dash of skepticism.  

As much as the cryptocurrency ecosystem seems similar to 2017, however, its underlying fundamentals have changed. During the previous bull run in crypto markets, small trades by retail investors ratcheted up Bitcoin's price volatility. Without much underlying liquidity, prices moved in a haphazard fashion, skyrocketing and crashing alternately, as traders moved cash in or out of the crypto ecosystem.

The current rally in cryptocurrency prices has occurred in a different landscape. Institutional investors are slowly but surely making their way into the crypto ecosystem. Their presence has brought much-needed liquidity to crypto markets, making them less susceptible to wild price swings due to small trades.

The regulatory guardrails for retail investors to dabble in Bitcoin this time are also stronger. For example, the U.K.'s Financial Conduct Authority (FCA) started a temporary registration regime last month for investors to verify whether crypto trading firms are registered with the regulator. In the United States, the Office of the Comptroller of Currency (OCC) has issued notices favorable to cryptocurrencies, and a new SEC chief, familiar with blockchain and cryptocurrencies is expected to take over from former chair Jay Clayton, who was widely reviled by crypto enthusiasts for his harsh statements about cryptocurrencies.

All of this means that retail investors may not leave crypto markets anytime soon.