Crypto Adoption Sees Institutional Investors Dominating Market Behavior

Institutional investment in cryptocurrencies has surged over the past year, which has taken them mainstream and changed the way they have been trading.

Institutional investors spent $120 billion on U.S. cryptocurrency exchange Coinbase Global Inc. in 2020, which ballooned nearly tenfold to $1.14 trillion last year. This was more than double that of retail traders, who spent $535 million. While this demonstrates that retail traders are still in the game, it also shows that the market they had previously traded in has now been overcome by more dominant market forces. “It’s a completely different game now than it was,” said Valkyrie Funds CEO Leah Wald. 

Investment brings attention

Consequently, much of the investment has also come along with promotion to the effect of cryptocurrencies becoming more mainstream. For instance, venture funds injected billions in capital into cryptocurrencies last year, while crypto exchanges targeted their swollen war chests on branding in an effort to become household names. 

Additionally, more than 80% of institutional investors are now allowed to have exposure to cryptocurrencies, according to an October survey of 300 institutional investors from State Street. It also reported that almost two-thirds of large funds with at least $500 million in assets under management already have teams dedicated to the crypto market. Notably, sovereign-wealth funds were found to be the only major institutional group not yet participating in the market, but State Street anticipates they would be within two years.

Changing trading behavior

In addition to bringing greater awareness to cryptocurrencies, their adoption by institutions has started to change the way the markets behave, causing them to mimic more traditional markets. Institutional traders treat cryptocurrencies as one asset within a diversified portfolio of other assets, and with such large positions, they have caused Bitcoin, for instance, to largely correlate with tech stocks. This has also been boosted by the anticipated interest rate hikes from the Federal Reserve, which has lowered interest in risk assets and diminished the market.

Demand has also led to a diversification of the crypto products companies are offering, such as derivatives exchanges, trading desks, and automated services. Meanwhile, crypto hedge funds have seen their numbers swell from 31, managing less than $1 billion in 2016 to currently about 856 with $68 billion in assets under management, according to data from Crypto Fund Research. Incidentally, despite growing adoption, which would usually generate greater price stability through establishing something of an equilibrium, this has not been the case with Bitcoin.

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