Now that institutional investors are buying up Bitcoin, what will it mean for the cryptocurrency market?
Much of the early draw to cryptocurrencies was the high “crypto” appeal. No governments back cryptocurrencies. Cryptocurrencies aren’t standardised against any material commodity. Institutional investors like banks and investment firms stay away from them. Right?
Institutional investors have stayed away from cryptocurrencies in the past, avoiding high volatility. Aside from the latest Bitcoin dip, major cryptocurrencies like BTC and ETH have been stable lately. As a result, some institutional investors have been gaining entry to the cryptocurrency market. Some transactions could have been done overnight. Other operations required more planning and show more intent for long term involvement.
So, which institutional investors are getting involved? What are they up to? How will this affect the crypto market?
What Are They Up To?
Bloomberg reported that institutions had replaced individuals as the largest Bitcoin buyers. Institutional investors had entered the market through organising transactions with Bitcoin miners. Specifically, “institutional miners”, who use fleets of computers to generate the digital currency.
The article also identified some of the institutional miners involved in these transactions. There was also some speculation on how institutional investors would influence the market. What the report lacked were names of institutional investors involved in the transactions. It was also unclear what they intended to do with Bitcoin and Ether that they were purchasing.
But why were institutional investors purchasing digital currencies over the counter from institutional miners? By staying off the market, institutional investors made purchases without giving away the fact that they were making the purchases. They bought bitcoins that had not been owned or used before, directly from miners. They were also able to set prices ahead of time and buy large amounts of Bitcoin. Those goals are difficult or impossible on the standard markets.
At the time of Bloomberg’s article publication, it was too early for much comment on what institutional investors were doing with their purchases. It was also too early to speculate on how institutional investors would affect the crypto market. The article did, however, discuss the “professionalization” of Bitcoin and the end of its “wild west days”.
Who Is Doing It?
Move ahead a little over a month to early November. Forbes Magazine publishes the names of some of the institutional investors involved. Names like Goldman Sachs, which started offering a Bitcoin trading product. The New York Stock Exchange is also becoming involved with a Bitcoin futures market.
Forbes also speculated that institutional investors’ involvement would increase security in cryptocurrencies. Furthermore, they suggested that institutional investors could stabilise the volatile cryptocurrency market.
What Does This Mean?
Institutional investors have tended to stay away from cryptocurrencies because the market is prone to volatility and risk. Many investors in cryptocurrencies are small-scale or investing out of a personal fortune. Institutional investors are neither of these things.
Institutional investors putting big money into cryptocurrencies may contribute to stabilising market. Yet, institutional investors reacting to market changes often makes markets more volatile. With cryptocurrencies being a volatile market, this could be particularly dangerous.
Speculation is difficult, but so is affirmation. Institutional investors waited until a period of market calm to buy in. We’ll never know what would have happened to the crypto market otherwise. Was it because of institutional investors if the market remains somewhat stable or strengthens soon? What about if it becomes less stable or fall?
Most likely, this will change the nature of the cryptocurrency market. Institutional investors could also make the market more accessible to more investors and traders. These will likely fill a place in the market between small-time investors and moguls.
Rupert Hackett is the co-founder of Bitcoin Australia, and has a wealth of experience with Bitcoin and Cryptocurrencies, including the world’s first Masters in Digital Currencies. He bought his first bitcoin in 2011, and in 2014 immersed himself in the crypto world with Bitcoin Australia and angel investor fund Dominet led by Domenic Carosa.
Quote: “I really think Bitcoin could change the world.”