When digital currencies originally caught the attention of investors, they tended to appeal to tech-savvy investors willing to take a risk. The digital currency market seemed to be dangerous in 2016, since it was a mostly unproven business with many issues about regulatory status, development possibilities, and more. Optimists may have hoped for a breakout run, similar to the big increase in cryptocurrency values that occurred late in 2017, but no one predicted that this would occur. Needless to say, institutional investors and others with client interests were not interested in digital currencies. Rather, the sector attracted private investors prepared to take a risk in exchange for a possible payout down the road.
But fast ahead to the final few months of 2018, and the picture is completely different. While many digital currencies remain robust, many have dropped dramatically from their highs around the turn of the year, and some investors have given up optimism that digital tokens could cause a rapid and seismic upheaval in the way the financial world operates. However, institutional investors are becoming more heavily involved in the industry, and they may be the most likely to continue to support it in the future. We’ll look at how institutional investors got engaged and why they’re interested in cryptocurrencies further down.
Institutional Investors Take the Lead
According to Bobby Cho, Cumberland’s global head of trading, institutional investors have eclipsed high-net-worth individuals as the leading purchasers of digital token bundles valued at more than $100,000 in private transactions, according to Bloomberg.
Along with growing institutional investor interest, there are new goods, services, and transaction mechanisms. According to Bloomberg, miners have turned to professionalizing their modes of transaction, in many instances setting up regular coin sales via their own liquidity desks and operations, when earlier they may have waited for a market surge to sell a supply of tokens on an external exchange.
All of this implies that the over-the-counter market for digital currency has expanded significantly. According to CoinMarketCap, as of April 2018, it was covering up to $30 billion in deals each day, compared to exchanges that had previously covered roughly $15 billion in trades per day. At the same time, as compared to the OTC market, exchange volumes have fallen more precipitously from earlier high points in the digital currency market.
Why did institutional investors, many of whom were hesitant to take a risk on cryptos just a few months ago, suddenly decide to enter the space? Much of it may be due to volatility. In recent months, the digital currency market has calmed down. Cho notes that “the market has been trading in a fairly tight range over this time period, and [that] seems to be coinciding with conventional financial institutions getting more comfortable jumping into the field.”
Private transactions are a logical match for institutional investors since big transactions on exchanges may cause token prices to fluctuate. Private sales enable transacting parties to pre-determine the price, removing some of the ambiguity and risk from the transaction. They also make bigger transactions possible, which may be appealing to institutional investors but are more difficult to perform on exchanges.
As the popularity of digital currencies has declined among individual investors in recent months, financial institutions have begun to enter the cryptocurrency industry. Looking forward, if these tendencies continue, they may wind up playing a critical role in sustaining the industry’s overall development.
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