Crypto markets have long waited for the entrance of large investors as the ‘Holy Grail’ of crypto adoption, bringing with them huge injections of capital into the crypto market and pumping up the total market capitalization beyond it static $300bn level. A report by Bloomberg on October 1, 2018, makes it clear however that large investment may indeed be already pouring into the crypto market – just not the way market analysts might have expected.
Adoption by Stealth?
Unlike what was expected by the received wisdom of the market, high net worth individuals are not playing the prominent role in pushing adoption by creating liquidity. It is, in fact, institutional investors who are increasingly picking up large amounts of cryptocurrency in several private transactions worth more than $100,000 each.
While many do not yet realize it, the $220 billion crypto market is becoming increasingly dominated by hedge funds, who have replaced HNIs in the investment sweepstakes and are staking bold claims to the future of crypto.
Speaking about this phenomenon, Bobby Cho, global head of trading at Chicago-based Cumberland, which is the cryptocurrency trading unit of DRW Holdings LLC also noted that many large miners have set up their own liquidity desks and operations, in the process becoming substantial crypto market players in their own right.
Speaking to Bloomberg he said:
“What that’s showing you is the professionalization that’s happening across the board in this space. The Wild West days of crypto are really turning the corner.”
This is particularly significant because crypto miners are able to offer so-called “virgin” coins – coins that can be easily proven to have no prior involvement in money laundering or criminal activity, which attract a 20 percent premium from investors wary of reputational risk.
OTC Market Booms
Research by Digital Assets Research and TABB Group reveals that the over-the-counter (OTC) crypto market helped along between $250 million and $30 billion per day in April trades. In contrast, according to CoinMarketCap, exchanges have handled roughly $15 billion in daily trades over the same period.
This means that while the OTC market has suffered in line with the rest of the crypto market during the ongoing downturn, it still does substantially better than exchange markets dominated by individual investors and HNIs, which are down 80 percent from their peak according to data from Digital Asset Research.
Emphasizing this, Circle Financial CEO Jeremy Allaire said:
“We’ve seen triple-digit growth enrolling in our OTC business. That’s a big growth area.”
According to Cho, the booming OTC market a function of the continued downturn. In his view, companies may have decided to jump into crypto because the market did not rally, signifying a less volatile state of the asset class and its readiness for institutional investment.
In his words:
“One of the biggest criticisms of crypto by institutional investors has been the volatility. 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 space.”
Additional reasons for the rise in OTC popularity with institutional investors is that unlike exchange transactions where prices can move and expose them to risk, OTC transaction prices are fixed in advance.