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Institutions Are Piling In: the Professionalization of the Blockchain Asset Class

Institutional investors are increasingly investing in blockchain markets. On the contrary to 2017, Bitcoin’s recent price increases are not retail-driven. The market structure has changed considerably. 

There is an opportunity in every crisis. Nowhere is this more true than in capital markets. 

When prices hit rock bottom investors are left with two choices: Holding their assets and wait for better days or buying more and realize profits once prices have recovered. 

To say it in Warren Buffet’s words, “Be Fearful when others are greedy and greedy when others are fearful.”

2017’s Crypto-Mania was retail-driven; markets have fundamentally changed since then

Prior to 2018, blockchain markets were primarily dominated by retail investors. Although blockchain proponents argued at the time that institutional investors were the main driver for medium to long term growth, institutions were rarely interested in the asset class. 

It’s not hard to see why: professional investors look at fundamental data rather than hype. In hindsight, they were right. The market crash in late 2017 caused the price of Bitcoin to drop from more than $19,000 to as low as $3,150. 

During the following one-year “crypto winter,” markets have undergone fundamental changes, resulting in an increasing professionalization of the blockchain industry. 

As the hype faded away, volatility decreased. In late 2018 and early 2019, Bitcoin’s volatility was lower than the volatility of the S&P 500 – a result of the withdrawal of retail investors who played a significant role in 2017’s “Crypto-Mania.” 

Early 2019 marked the entry point for institutional investors that had so far been sitting back and watching. Investment firm Grayscale, which oversees more than $2 billion in Assets under Management, reported a significant inflow of institutional capital into its Bitcoin Investment Trust in Q1 2019. 

“Many institutional investors may view the current drawdown as an attractive entry point to add to their core positions in digital assets,” reads Grayscale’s Q1 report. According to the report, 73% of investments into the firm’s digital investment products came from institutional investors. Likewise, regulated platforms like CME experienced record volumes. 

Institutions taking the lead will result in more price stability and long-term growth

The influx of institutional capital has also driven Bitcoin’s recent rally. Analysts from JPMorgan confirmed that the price hike from $7,000 to $9,270 between June 11th and June 18th was mostly caused by institutional money. 

Still, retail investors are in the market as well. A recent poll by Bitcoin Research Labs in Germany reports that 9.2 percent of adult internet users currently own digital currency. Considering that only 7.1 percent directly invest in stocks – that’s excluding mutual funds – digital currencies have taken the top spot as the most popular direct investment vehicle.

The difference to 2017 is that retail investors are not driving the markets anymore. The lead of institutional investors matters, because they tend to invest with a long-term strategy, intending to hold an asset for an extended period. This, in turn, will contribute to price stability, making a 2017-like scenario less likely.

JPMorgan’s Analysts point out that the “market structure has likely changed considerably [..] with a greater influence from institutional investors.” While Bitcoin’s surge in 2017 was largely retail-driven, institutional buying is more stable and less prone to sudden, fear-driven volatility spikes. So, this time is different – in a good way. 

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