Is Institutional Money a Threat to Crypto’s Long-Term Viability?

| Publish date: 06/20/2018

Cryptocurrency Market

Crypto markets in 2017 were dominated by the gold rush initiated by optimistic retail investors and bitcoin’s race to nearly $20,000. 2018, unfortunately, brought cryptocurrency valuations back to reality and cooled the retail market’s sentiment somewhat. This has left the sector with a real question of what the future holds, and doubts about cryptos’ long-term viability.

As the first half of 2018 comes to a close, financial experts and industry observers have noted that institutional interest in cryptocurrency trading is on the rise. For now, most institutional investors are still dipping their toes in the water, although some already have significant exposure to markets. As the regulatory environment continues to brighten for the broader cryptocurrency market, institutional money is bound to flood into the market.

The real question, however, is whether this is good or bad for cryptocurrencies. To some, institutional investment is a stabilizing force that will reduce the overall volatility that has defined crypto trading until this point. To others, it could lead to further centralization as major banks carve out stakes in the largest coins. To these industry insiders, institutional money carries the risk of abandoning the vision of cryptocurrency’s creators. While it’s still too early to tell, there are some indicators as to the impact the entry of institutional investors into cryptocurrencies.

An Influx of Capital and Sustainable Growth

For many outside observers, institutional money is not a threat to cryptocurrencies—it is the only way to reach their full potential. After the capitalization of the entire cryptocurrency ecosystem nearly reached $1 trillion in value (maxing out at $800 billion) during January, prices have since retreated substantially, erasing more than 70% of their highest valuation before rebounding. The furor that drove prices higher was mostly propelled by a massive surge in the number of retail investors joining the market.

For the most part, institutional investors have been hesitant to jump into the market before due to uncertain regulatory outlooks and the massive volatility cryptocurrencies have become associated with. Nevertheless, growing positive sentiment amongst regulators and bitcoin’s recent stabilization has created an opening for institutional money to flow in, something many industry experts say is much needed. Furthermore, the introduction of instruments tracking cryptocurrencies like CME Group’s bitcoin futures contract have made it easier for institutional participants to remain compliant with regulators.

To these observers, events like the SEC reviewing the possibility of listing bitcoin ETFs on the New York Stock Exchange, George Soros permitting his investment fund to enter the crypto market, and the rumors surrounding Goldman Sachs’ pending entry to the ecosystem all point to a positive change across the crypto industry. One major reason institutional investment has been so sporadic is the lack of liquidity and spotty security the current exchange ecosystem provides.

147 new crypto funds are expected to be launched in 2018, and though the current total funds managed in crypto is a small fraction of most institutional investors, that trend is set to change shortly. This influx of institutional interests is also set to bring stability to prices. To attract institutional whales to these abundant opportunities, cryptocurrencies will have to be significantly more regulated, which will hopefully gradually reduce the enormous volatility commonly associated with the market.

Big Money Makes More Whales

Even so, such a large flood of institutional money from a few sources could create more whales that hold large stakes in the most valuable cryptocurrencies. There are already serious concerns that users with large crypto holdings can easily manipulate or distort prices. While banks and hedge funds are significantly more restricted in their ability to truly manipulate markets, the current lack of regulation means that the largest wallets generate an outsized influence on crypto prices.

Moreover, such large-scale entry into the market will undoubtedly draw a sharp eye from regulators worldwide and accelerate the creation of a regulatory framework. This, in turn, could create a situation that centralizes authority and diverges from bitcoin’s—and other cryptocurrencies’—original vision of decentralized peer-to-peer networks. These fears are not entirely unfounded, but the current situation has not born this out yet. Regardless, adding more whales with competing interests may also have an adverse effect and reduce price growth.

Institutional Money Is Good—For Now

In the end, the crypto market could greatly benefit from an influx of institutional investment, at least over the short-term. Inflows of capital and liquidity, as well as the necessary re-framing of exchanges that will come with requirements for greater transparency, will push the market further. Moreover, an increase in regulation might also prove to be a stabilizing force for prices, though this factor may be a negative characteristic over the long-term. Nonetheless, the entry of institutional money appears inevitable, potentially pushing bitcoin and the entire cryptocurrency market to the next big milestone in 2018.


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