Institutional players investment into the crypto market: pros and cons

Since crypto market became more and more interesting for dedicated to crypto adoption by institutional players. How did it start, and how big can we expect it to grow? How does it affect retail investors? And finally, how does it influence the crypto market in general?

So let’s go deeper.

What happens to central banks when an unexpected event like a global lockdown and its economic effects occur? In March 2020, The US Federal Reserve lowered interest rates to zero to engage the economic stimulus. Probably from your high school economics classes, you may know that individuals and businesses tend to demand more loans when interest rates are low. According to the quantity theory of money, a growing money supply increases inflation. Thus, low-interest rates tend to result in more inflation.

Bitcoin’s explosive rise in price drew enormous attention from the press and public, making the year something of an inflection point regarding global interest.

More and more people started looking at Bitcoin as the new black, “the digital gold” on a mission against inflation, thanks to Bitcoin having a hard cap of 21 million coins that can be mined. These factors changed the way institutions look at investments into digital assets and assume that that’s what the future holds. It’s almost like they didn’t even have the chance to be proven wrong in their assumptions since, in May 2020, the supply of newly mined bitcoins was cut in half.

The Institutional Investors Digital Assets survey published in June 2020 by Fidelity Digital Assets highlighted that 36% of institutional investors surveyed currently invest in digital assets. More than 6 out of 10 investors feel digital assets have a place in portfolios.

In addition, according to the survey, institutional investors believe that the most common obstacles to digital asset adoption are price volatility, concerns around market manipulation, and a lack of fundamentals to gauge appropriate value. Funny enough, there is a strong correlation between the market share of institutional investments and the market volatility. The more institutional money there is, the less volatility occurs. The survey spanned various investor segments, including high-net-worth individuals, financial advisors, family offices, crypto hedge and venture funds, traditional hedge funds, endowments, and foundations.

Some could say that this is the end of profitable high leverage trading for small retail investors.

The recent announcements from prominent public figures like Mastercard, Tesla, and JP Morgan about supporting and owning cryptocurrencies added more fuel to the flames.

In February 2021, Tesla announced a $1.5b Bitcoin purchase and sold 10% of it in April to improve market liquidity, not even mentioning that Tesla products from now on can be bought will Bitcoins.

Shortly following, in March 20201, Mastercard announced that it would “start supporting select cryptocurrencies” and create “more opportunities for shoppers and merchants…to transact in an entirely new form of payment.” meaning that the transactions can be settled using a USDC stablecoin.