The traditional finance sector is undergoing a gradual but significant shift towards the crypto sector. This transition is driven by a range of factors that highlight the growing relevance and appeal of cryptocurrencies and blockchain technology.
Starting in 2017, institutional interest in digital assets began to rise, welcoming niche crypto funds, hedge funds, investment corporations, family offices, and technological companies. Companies like Tesla naturally grew the legitimacy and attractiveness of crypto in the eyes of other traditional entities, without having any informational purposes. This trend may significantly increase the crypto market capitalization, considering that over 80% of the trading volume of US stocks falls to institutions, and they are now actively engaging in the crypto market.
Let’s discuss what differentiates institutional trading of crypto from retail investments and what stimulates them to enter this new market.
Digital Asset Investing: Institutional Features in Comparison with Retail
There are several crucial differences between retail and institutional investing:
- Investment size. Institutional investment managers allocate sums that wield a substantial impact on crypto spot prices and liquidity. Institutions manage billions in crypto, unlike retail traders.
- Strategies. While the typical retail investor employs simple trading strategies, their institutional counterparts utilize advanced analytics-driven trading and investment approaches.
- Risk. Institutions place a significantly higher emphasis on risk management and adopt a notably more cautious approach in comparison to retail traders. That is likely because they are often managing other people’s capital rather than their own.
- Governance and compliance. Institutions are bound by stringent corporate regulations compared with retail investors. They operate under heightened scrutiny to ensure strict adherence to regulations and standards.
Benefits and Ways for Institutions to Enter the Crypto Industry
Institutional investors join the crypto space at a rapid pace. They do it in the following ways:
- Buying popular digital assets to capitalize on their further growth. The most popular and liquid digital assets such as Bitcoin and Ethereum are common among family offices and technology companies. They call Bitcoin “digital gold”, while the ETH crypto asset is called “digital oil”.
- Arbitrage opportunities in institutional assets trading. That includes arbitrage across liquidity providers, arbitrage with stablecoins, cross-exchange arbitrage, and other types. The idea is to capitalize on price differences.
- Venture capital and technological growth. Today, many businesses and startups use blockchain technologies to raise investments through token sales, and institutions are actively participating in them.
While quite popular among retail traders, the crypto industry is welcoming institutional investors as well. They find this space attractive due to earning opportunities, arbitrage, and technological growth, possible with early investments into blockchain businesses and startups.