26 Sep Are institutional investors ready to enter the cryptocurrency market?
A new research report from TABB Group says the bitcoin over-the-counter (OTC) market may be as much $12 billion compared to the $4 billion estimated to trade on cryptocurrency exchanges daily.
In a post on NASDAQ’s newsletter, TABB Group says this can lead to price manipulation because ownership is concentrated and the cryptocurrency market is shallow.
Most of the $12 billion daily bitcoin OTC trading is done by large individual cryptocurrency investors, sometimes called “whales” and who can manipulate prices through unregulated trading.
The report says:
“For example, whales could sell $200 million worth of bitcoin to move the spot price down to meet the price of their futures contracts. A similar sale on an exchange would crash the market and unduly damage investor confidence, as there would not be regulatory clarity pushes the price of bitcoin down more gently and controllably, with little long-term damage to a market where the whale wants to continue swimming.”
What are institutions looking for?
When it comes to entering the cryptocurrency market, TABB Group says institutional capital is ready to flow into this market if three key improvements occur:
- regulatory clarity: SEC, Department of Justice, and Commodity Futures Trading Commission jurisdiction and guidelines are in development and need certainty
- institutional grade data: transparency in data reporting requirements
- enterprise-ready infrastructure: cryptocurrency markets lacks infrastructure and is now in the early formation stages of trying to replicate traditional market structure in the digital securities environment.
Investor perceptions of cryptocurrency
A July 2018 Triad Securities survey found that 62% of institutional investors were actively considering bitcoin investments.
The survey also offered additional insights into the mindset of institutional investors towards cryptocurrencies:
- When asked what might stabilize cryptocurrency by the end of 2018: 51.9% said “US regulatory approval of an institutional-grade custody solution”; 26.9% said greater merchant adoption; 21.3% said they foresaw no stabilization; 19.4% said more aggressive regulatory actions; and 17.1% said global uncertainty of traditional investments could help stabilize cryptocurrency
- 47.7% had invested in bitcoin or other cryptocurrencies, participated in an Initial Coin Offering (ICO) or a Securities Token Offering (STO); 34.3% had looked into such investments
- biggest barriers to institutional investment included: regulated custodial solutions (44.9%); issuer transparency (31.9%); regulated exchanges (27.3%); institutional levels of daily liquidity (23.6%)
- 53.2% said it was “very” important that custody should be regulated by government or other entity; 33.8% said it was “somewhat” important
- when asked if cryptocurrency could become a global reserve asset, 38% said no while 33.3% said yes but not necessarily bitcoin
- 52.3% said valuation was mostly a function of crowd psychology.
What’s driving institutional interest in cryptocurrency?
NASDAQ highlighted several recent industry developments that point to growing interest by institutional investors.
Coinbase, Ledger and Circle’s efforts to establish custodian services could kick-start conversations with financial institutions.
Bank of New York Mellon Corporation, Northern Trust and JPMorgan are investigating cryptocurrency custodial and trading services.
SEC approval of Coinbase’s custodial service was viewed positively along with Japanese Nomura Holdings launch of Komainu custody consortium with Ledger and Global Advisors.
Giant fund managers Fidelity and BlackRock are hiring cryptocurrency traders and getting ready to work with cryptocurrency exchanges approved by regulators.
Momentum for institutional investment in cryptocurrency is building as the foundations are being put in place for the new age of digital securities trading ahead.
The key question is can regulators quickly and effectively provide a regulatory framework and transparency guidelines that protect investors without stifling the technology innovation and momentum.[/vc_column_text][/vc_column][/vc_row]