When digital currencies first attracted investor attention, they tended to appeal to tech-oriented investors looking to take a bit of a risk. A largely untested industry with lots of questions regarding regulatory status, growth prospects, and more, the digital currency space of, say, 2016 appeared to be risky. Optimists may have hoped for a breakout run, like the massive uptick in cryptocurrency prices which took place late in 2017, but no one knew that this would happen. Needless to say, digital currencies were not an appealing prospect for institutional investors and others with client interests to keep in mind. Rather, the industry appealed more to individual investors willing to take the risk for a potential payoff down the line.
Fast forward to the last few months of 2018, though, and the story looks very different. While many digital currencies are still holding strong, they have fallen significantly from their highs around the turn of the year, and some investors have given up on their hopes that digital tokens will bring about a sudden and seismic shift in the way that the financial world works. However, institutional investors are at the same time becoming more heavily invested in the space, and in fact, they may be the most likely to continue to support it going forward. Below, we'll explore how institutional investors have gotten involved and why they've turned their interests to cryptocurrencies.
Institutional Investors Take the Lead
According to Cumberland's global head of trading, Bobby Cho, institutional investors surpassed high-net-worth individuals as the largest buyers of digital token packages valued at more than $100,000 and through private transactions, per Bloomberg.
Along with new interest among institutional investors, there are also new products, services, and methods for transacting. Bloomberg reports that miners have taken to professionalizing their modes of transacting, setting up regular coin sales via their own liquidity desks and operations in many cases, while they previously may have waited for a market rally to sell a supply of tokens on an external exchange.
All of this means that the over-the-counter market for digital currencies has ballooned. As of April of 2018, it was covering up to $30 billion in trades per day, as compared with exchanges which have recently covered about $15 billion in trades per day, per CoinMarketCap. At the same time, exchanges have seen their volumes fall more precipitously from previous high points in the digital currency market when compared against the OTC market.
Why did institutional investors, many of which were reluctant to take a chance on cryptos just months ago, suddenly decide to dive into the space. A lot of it may come down to volatility. The digital currency space has settled down in recent months. Cho explains that, in this time period, "the market has been trading in a very tight range, and [that] seems to be corresponding with traditional financial institutions becoming more comfortable diving into the space."
Private transactions are a natural fit for institutional investors because large transactions taking place on exchanges can shift the price of tokens. Private sales allow transacting partners to fix the price ahead of time, taking some of the uncertainty and risk out of the process. They also facilitate larger transactions, which may appeal to institutional investors but are more difficult to complete on exchanges.
As the popularity of digital currencies among individual investors has waned in recent months, financial institutions have started to step in to participate in the cryptocurrency market. Looking forward, and if these trends continue, they may end up playing a crucial role in supporting the continued growth of the industry overall.