Skip to content

5 reasons why institutional investors refuse to join the cryptocurrency industry

May 7, 2020

In the past two years, cryptocurrency media and advocates of Bitcoin (BTC) have had one great emphasis on the need for institutional investors to introduce cryptocurrencies. The most widespread belief was that institutional entry would lead to mass adoption and an incredible increase in the value of crypto assets overall.

If we fast forward to the present, the total capitalization of the cryptocurrency market is It has not yet reached the all-time high of $ 750 billion it recorded in late 2017.

The slow recovery in cryptocurrency prices raises some difficult questions to answer. If institutional funds flowed into cryptocurrencies, Why haven’t prices increased significantly in the past three years?

5 reasons why institutional investors refuse to join the cryptocurrency industry5 reasons why institutional investors refuse to join the cryptocurrency industry

Either there is almost infinite selling pressure – which shouldn’t be an obstacle given the total market capitalization of cryptocurrencies of only $ 248 billion – or this theory that institutional investments are driving up cryptocurrency prices is not up to the task. Here are three reasons why institutional investors have not yet entered the crypto market.

The entrance ramp is still too steep

Investing in Bitcoin, the leading crypto asset listed on CoinMarketCap, remains a major hurdle for large mutual fund managers, especially considering The perceived risk of Bitcoin.

To do this, add the additional buying steps required compared to traditional assets, and The process of buying cryptocurrencies only is uncomfortable. The internal regulation of some funds also does not allow investment in certain products, while others do not low liquidity of regulated and approved spaces.

Presence does not mean winning or guaranteeing a bull market

The arrival or presence of institutional investors inevitably leads to buying pressure. Renaissance Technologies Medallion Funds’ recent entry into the CME Bitcoin futures markets is a perfect example.

It should also be noted that CME futures are settled in cash. They don’t necessarily involve commercial activities in Bitcoin. More importantly, a hedge fund can also open short positions.

Investors should ask: Why should they celebrate a $ 10 billion fund coming into the room to bet on the price of Bitcoin?

Yes, the cryptocurrency derivatives market has grown significantly, and these are the preferred instruments for institutional-sized investors They remain incredibly complex for the average private investor.

The build up of positions through futures could since then cause high costs Contracts expire every two months. In addition, this would mean that investors would run the risk of trading a premium that is negative compared to the spot market, as there are usually costs for the transition to the next term.

Simply put Forward contracts are not long-term.

The cryptocurrency market is too small compared to traditional markets

Even though Bitcoin has astonishing returns, There are other reasons why a $ 94 trillion industry won’t blindly buy cryptocurrencies in the near future.

Market capitalization for cryptocurrencies in perspective. Source: BitcoinIRA

The capitalization of the cryptocurrency market in perspective. Source: BitcoinIRA

No matter how many times the chart above has been displayed, it is still pretty impressive. The $ 248 billion cryptocurrency market cap is just one point in the capital markets. The Japanese yen banknotes are currently in circulation amount to $ 1 trillionThis does not apply to bank deposits or government bonds.

The world’s 20 largest wealth managers together monitor $ 42.3 trillion. An investment of just 0.5% in cryptocurrencies would end up at $ 211 billion, which is 84% ​​of the total market cap.

Despite the fact that recent years have shown that cryptocurrencies can offer an infinite advantage, it must be recognized that cryptocurrencies are not nearly on the same playing field as traditional markets. Grayscale Investments manages $ 3 billion, the largest publicly available institutional investment tool for cryptocurrencies.

Despite this considerable amount, it remains insignificant in the eyes of the world’s largest money managers.

Top 7 owners of JPMorgan  Bank Of America shares. Source: CNN Business

Top 7 JPMorgan Bank Of America stockholders. Source: CNN Business

Banks, credit cards, insurance companies and brokerages make up a significant part of the portfolio of almost all large asset managers. BlackRock, State Street, Vanguard, Fidelity and Wellington are consistently among the top 20 holders of financial stocks.

Banks play an important role in this area as HSBC, JP Morgan, Goldman Sachs, Deutsche Bank, BNP Paribas, UBS and Wells Fargo are among the largest mutual fund managers in the world.

This relationship is deeper because banks are relevant investors and distributors of these independent mutual funds.. This linkage continues, with key players in the financial industry dominating equity and debt offering and coordinating investment fund allocation in such operations.

There isn’t much room for a mutual fund manager to sit on the wrong side of the table when it comes to the traditional financial industry.

At the moment Cryptocurrencies are in no way a threat to Visa, Wells Fargo, Chubb or Charles Schwab. It doesn’t matter how well decentralized funding works or how big Bitcoin transactions are currently.

So the question investors should be asking is: what is preventing institutions from committing and what would it mean to them to invest in cryptocurrencies?

Regulatory pressure remains an obstacle

Former Chairman of the Commodity Futures Trading Commission, J. Christopher Giancarlo, He admitted in October 2019 that his agency, along with the Treasury, the U.S. Securities Market Commission, and the National Economic Council, was considering suppressing the incredible 2017 Bitcoin rally.

This government-backed plan culminated in December 2017 when CME and CBOE were quoting bitcoin futures contracts – a day after the famous $ 19,700 Bitcoin cap.

In May 2019, U.S. Congressman Brad Sherman urged his colleagues to ban cryptocurrencies. President Donald Trump tweeted in July 2019:

“”I am not a fan of Bitcoin and other cryptocurrencies that are not money and whose value is very volatile and air-based“”

Most recently, US Treasury Secretary Steven Mnuchin, promised “significant new requirements” for cryptocurrencies.

In October 2019, United States senators sent a letter to three companies supporting Facebook’s Libra project. citing “the risks the project poses to consumers, regulated financial institutions and the global financial system”.

Despite the fact that Bitcoin isn’t widely regarded as a competitor of Fiat money, It would be almost certain that cryptocurrencies would reach a trillion dollar market cap.

Liquidity and easy access

BAKKT has a product designed to facilitate the process of mutual funds investing in Bitcoin. Bitcoin futures contracts with physical delivery enable purchases to be made in a fully regulated location, including the custody process.

As we reported in Cointelegraph, BAKKT is controlled by the Intercontinental Exchange, which owns the New York Stock Exchange. Customers wishing to trade these products must do so through the usual brokers used for stocks and futures.

Volume of BAKKT's Bitcoin Monthly Futures contracts. Source: Twitter @BakktBot

The volume of monthly BAKKT Bitcoin futures contracts. Source: Twitter @BakktBot

Private investors have been waiting for the introduction of BAKKT for a long time Your arrival should be a sign that the cryptocurrency sector had received the blessing of institutional investors. The estimates that a new all-time record would be reached in 2018 and 2019 were relentless and in most cases wrong.

After the start, an apparently perfect solution resulted in an average daily volume to this day it is still irrelevant. There are numerous reasons why this could occur:

  • Only a few brokers currently offer BAKKT products.
  • The internal regulations of many funds do not allow ownership of physical Bitcoin-based investments.
  • Additional bureaucracy (controls) is required so that the funds can be approved by BAKKT.
  • Physical bitcoin is not accepted as a leverage range.
  • Limited from Sunday to Friday from 8 p.m. at 6 p.m. trading hours.

Although the fund’s internal regulations may change to reflect Bitcoin investments, This may not make much sense for multi-million dollar mutual funds at this time.

Analysts and portfolio managers proposing to add a new asset class to secular mutual fund managers would take immense personal risk.

Cryptocurrencies can and will be scaled without institutional money

The purpose of this piece is not to alienate investors from Bitcoin and cryptocurrencies. Experts and analysts with no real market experience have promised impossible scenarios for too long. If Bitcoin’s market cap is still below $ 1 trillion, you can be sure that you got to the party early, and that’s not necessarily a good thing.

An unlimited upload can be made for this asset class It is almost certain that institutional investors will come in gradually and then suddenlya. It is important to know at the moment that a multi-billion dollar mutual fund industry does not have sufficient reason to invest in such an emerging asset class.

Cryptocurrencies don’t need a mutual fund industry. it’s the other way around. Bitcoin is money for ordinary people and an investment in itself.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and every trade step involves risks. You have to do your own research when making a decision.

Receive Breaking News !

Install
×
Enable Notifications    Ok No thanks