It is often said that
crypto will remain on the fringe of the financial world until it is
accepted by institutional investors. But institutional investors are
getting more involved in cryptocurrency markets than you may realize.
Hedge funds have replaced high net-worth individuals as the main buyers of large amounts of cryptocurrency according to Bobby Cho, the global head of trading at Cumberland, the cryptocurrency trading arm of DRW Holdings LLC, which deals with over the counter purchases. Over the counter, purchases do not occur on exchanges and statistics are not always readily available as to volumes.
The main sellers remain miners who are rewarded with currency for processing transactions on the various networks. Many large-scale mining operations have their own liquidy desks.
“What that’s showing you is the professionalization that’s happening across the board in this space,” Cho has said. “The Wild West days of crypto are really turning the corner.”
Last April over the counter markets dealt with anywhere between $250 million to $30 billion in trades per day according to Digital Assets Research and the TABB group. Coinmarketcap states that exchanges are handling around $15 billion per day in trades.
have decided to enter into crypto as the market appears to have
matured and the wide price swings have calmed.
“One of the biggest criticisms of crypto by institutional investors has been the volatility,” Cho has stated. “Over the last four to six months, the market has been trading in a very tight range, and that seems to be corresponding with traditional financial institutions becoming more comfortable diving into the space.”
Large buyers and sellers have been trading privately in over the counter sales and avoiding exchanges as prices fluctuate on exchanges and the two parties do not need to worry about sudden price changes just as the transaction is about to place. These trades also do not affect market prices when large sums change hands.
When miners liquidate coins they are often doing this via over the counter trading. According to Tom Flake of Because, the largest miners sell their coins to sellers directly or via a brokerage.
institutional investors are buying from sources other than exchanges
is that quite often there are not as many coins available for sale as
they would like, according to Sam Doctor, the managing director of
Fundstrat Global Advisers.
“At this point in time, because more and more institutions are beginning to enter the market, there’s more of an imbalance,” Doctor has said. “That’s why brokerage firms are springing up to help institutional buyers find inventory”.
Coins purchased from miners have a unique quality that is strongly desired by institutional investors. These coins can command a premium of 20% above market value. The benefit to the investor is that they can show the coin’s provenance and prove that the coin has not been involved in illicit or money laundering operations.
Bloomberg has reported that Yale University, the Ivy League school whose endowment is the second-largest in higher education has invested in a new cryptocurrency hedge fund called Paradigm who has raised over $400 million US dollars from a range of investors.
Fred Ehrsam, co-founder of Coinbase Inc, former Sequoia Capital partner and ex-employee of Pantera Capital have reportedly launched the new cryptocurrency hedge fund.
Yales $30 billion US dollar endowment is led by David Swensen who has invested an undisclosed amount in Paradigm as part of the institutions vision to allocate 60% of its investments into alternative assets by 2019.
For three decades the Yale endowment has outperformed every academic institution in the United States. As a result of this unparalleled success, Swensen has become one of the most influential figures in the institutional investor market.
In June this year, Erik Schatzker, a billionaire investor told the Bloomberg Invest Summit in New York that the entrance of a major institutional investor into the crypto market will lead to other firms accumulating cryptocurrencies like bitcoin and Ethereum in large amounts.
“It won’t go there ($20 trillion) right away. What is going to happen is, one of these intrepid pension funds, somebody who is a market leader, is going to say, you know what? We’ve got custody, Goldman Sachs is involved, Bloomberg has an index I can track my performance against, and they’re going to buy. And all of the sudden, the second guy buys. The same FOMO that you saw in retail [will be demonstrated by institutional investors],” suggested Novogratz.
Yale is one of the first major institutional investors in the market. It is quite feasible that this bold first move could spark fear of missing out (FOMO) amongst other institutional investors. could this explain the recent improvement in crypto prices and signal an end to the crypto winter?