Is Cryptocurrency Volatility Deterring Institutional Investors?
- 11 Mar 2021
Cryptocurrencies are moving closer to the mainstream, particularly in the European Union. However, they are still volatile, while hype and misinformation are plentiful. Uncertain future is a red flag for institutional players. Will they eventually embrace crypto?
Bitcoin still sparks spirited debates among pundits. Now, cryptocurrencies are exchanged, borrowed, and traded. With a crypto debit card, you may convert them to fiat and withdraw from an ATM. Still, the majority of institutional players seem deterred.
Causes of Concerns
According to Jeff Currie, Goldman Sachs' global head of commodities research, in January 2021, the entire crypto asset market was valued at around $700 billion. This is spectacular growth from $18 billion in early 2017. However, in an interview for CNBC, the expert noted that only a meager 1% of this volume is institutional money.
According to IPE, the leading EU publication for institutional investors, hype and unreliable information are the culprits. They prevent cryptocurrencies from becoming a legitimate asset class for institutions. The first Bitcoin investors earned millions and billions (at least on paper). This tiny group of pioneers holds the majority of the market capitalization.
Meanwhile, those who joined in later run the risk of substantial losses. The control group needs to sell its cryptocurrency to gain profit — i.e., monetize their spectacular paper gains. Thus, the number of willing buyers should also be increasing all the time.
Volatility makes future income uncertain. And as the system relies on an ever-growing number of buyers, critics compare it to a Ponzi scheme. If large investors began massive selling, this would trigger panic.
A Different Philosophy
To become involved, institutional players could think differently — e.g., refocus on the provision of exchange services. However, the value of their endeavors would still be uncertain. The key criteria still matter:
Role of the asset within a portfolio
According to LMAX's David Mercer, institutional trading should occur on a separate internationally trusted marketplace. This would involve major banks acting as central credit counterparties. They would provide fund managers or hedge funds with money for cryptocurrency activities.
This concept is at odds with the very premise of crypto. Max Boonen, CEO and founder of cryptocurrency liquidity provider B2C2 sees transactions without intermediaries as the basic principle. As a result, investors are faced with a paradox: these assets cannot be taken away from their owners, but their value is extremely volatile. Besides, pension funds will never invest in Bitcoin if they view it as a currency rather than an asset.
The Bottom Line
The appeal of Bitcoin for institutions is still doubtful. Volatility means the yield is questionable, which makes crypto unacceptable for their portfolios. On the other hand, if crypto coins are eventually linked to fiat counterparts, this will end decentralization, causing dependence on the respective countries' monetary policies. Hence, institutional participation is still modest, and the hesitation is understandable.