Why institutional investors are changing their ways

Institutional crypto investing involves large financial institutions buying and selling cryptocurrencies like Bitcoin and Ethereum. Unlike individual traders who might buy a small amount of Bitcoin for personal investment, institutions deal in large volumes, often involving millions of dollars. This significant influx of capital can have a substantial impact on the market, influencing prices and trading volumes.

A large number of investors cited the advancement of the market and custody infrastructure as reasons for their investment. This indicates that trading and storing cryptocurrencies have become more dependable and secure, increasing their appeal as an investment option.

In addition, they also offer diversification. Traditional investment portfolios include stocks, bonds, and real estate. By adding digital assets, institutions can spread their risk across different types of investments. They also have the potential to deliver huge returns.

According to a poll, institutional investors, such as hedge funds, mutual funds, and pension funds, are showing a growing interest in cryptocurrencies. Surprisingly, one-third of the survey participants mentioned that they had allocated at least 10 percent of their investment portfolio to cryptocurrencies. So, what is leading to a growth in institutional crypto trading? 

Institutional crypto trading platforms cater to the specific needs of large-scale investors. Specifically, they’re designed to promptly handle a large number of trades—far greater than the individual investors. As a result, they have access to over-the-counter (OTC) markets for private and large-scale transactions that retail investors don’t have. Aside from their volume, institutional traders must also comply with stricter institutional governance and reporting requirements than retail investors. The security needs and measures they must take are greater than those of the retail investor.

In addition, institutional crypto traders often have access to sophisticated trading tools and derivative products, including algorithmic trading and bot strategies, which allows for a greater diversity of risk management strategies. In comparison, retail investors mostly rely on tools provided by crypto exchanges. Finally, institutional crypto investors typically have preferential fee structures.

The involvement of institutional crypto investors means that the market becomes less volatile. While crypto prices are still known for their fluctuations, the sheer volume of institutional trading helps stabilize prices somewhat. In addition, as reputable financial institutions invest in cryptocurrencies, the market gains legitimacy. This can lead to broader acceptance and potentially clearer regulations, which benefits all investors. Institutions also make the market more liquid, which means it is easier for investors to enter and exit their positions.

The future brings both enormous potential and the possibility of pitfalls. Among the pitfalls are regulatory uncertainty, security requiring protective measures against the risk of hacks and fraud, and ongoing market volatility. However, as the market continues to mature and these potential pitfalls are resolved, the future may look like a universe in which digital and traditional assets exist together in one fully integrated market.

This article was written in cooperation with Tom White