Institutional investors in the cryptocurrency market in 2020

Institutional investors have been eyeing the crypto market for a long time. In 2017, many of them were attracted by settlementCME bitcoin futures, but they did not allow to buy real bitcoin.

Only in 2019 did completely legalDeliverable Bitcoin Futures for Bakkt and ErisX, and later Bitcoin Options for Bakkt and CME. How did institutional investors enter the cryptocurrency market? How will their role change in 2020? What new features are expected?

How did the cryptocurrency market prepare for the arrival of the institutional?

Despite the profitability of cryptocurrencies, for a long time, institutional factors (as cautious highly professional players) were scared away by two factors:

1. Legal uncertainty.In the USA and other developed countries (whereconcentrated institutional capital) for a long time there was no generally accepted legal scheme for investing in cryptocurrencies. In particular, no one could guarantee that after the next political turn, investments already made would not be suddenly declared illegal.
2. Volatility and manipulation.The cryptocurrency market already had at least two largebubble recovery after which lasted for years (the record of 2017 has not yet been repeated). A significant part of the money supply is concentrated in a small number of whales, which can manipulate the market through sharp pumps and dumps.

The first serious step to attractinstitutions entered the market in December 2017, when settlement Bitcoin futures appeared on the CBOE and CME exchanges. They did not allow the purchase of Bitcoin itself, but provided the opportunity to legally play on its price fluctuations. Legitimacy was guaranteed both by the authority of these world-famous exchanges and by the lack of direct investor contact with the legally gray BTC.

In 2018, as the bubble deflated, volatilitycryptocurrencies have dropped significantly, and among institutions there has been increased interest in directly purchasing them. In 2019, legal platforms for delivery of Bitcoin futures Bakkt and ErisX were opened. Institutions now have the opportunity to legally invest directly in BTC.

Despite Bakkt's weak start in September,Institutionals managed to successfully saddle (perhaps even lead) the bearish trend in the cryptocurrency market. After waiting for the fall of BTC from winter from $ 9000 to $ 7000, they intensified: during the site’s operation, the typical daily trading volumes rose from hundreds of thousands to tens of millions of dollars.

New Opportunities for Institutionals in 2020

Autumn 2019 opened to institutionalfull road to the cryptocurrency market. More and more real bitcoins began to settle at banks, investment funds and other companies. In turn, in winter, new opportunities and prospects appeared for them that could make 2020 a watershed in terms of the degree of institutional contribution to the cryptocurrency market.

Bitcoin Options

In the fall of 2019 on the “official” marketThere were both settlement and delivery Bitcoin futures, but no other derivatives. In December, the Bakkt platform corrected this by opening trading in deliverable Bitcoin options, and in January, CME offered investors settlement Bitcoin options (more precisely, options on settlement Bitcoin futures).

Due to the special authority of CME, its toolsturned out to be more popular: in the first week of trading, the daily volumes of CME bitcoin options amounted to several million dollars, while Bakkt options for the entire first month of trading in total barely attracted $ 1 million. Be that as it may, now there are four types of BTC derivatives on the legal exchange market of the USA: settlement and delivery futures and options.

Futures and options on the air and other cryptocurrencies

Although BTC has firmly established itself in the derivatives market,There are no similar official instruments for other cryptocurrencies yet. Their appearance is hindered not only by the dominant position of BTC, but also by the need for regulatory authorities to consider each currency separately.

Some currencies like Bitcoin SV and Bitcoin Goldsubject to manipulation is much stronger than BTC. On BTG, 51% attacks even happened twice. Such currencies are unlikely to receive the green light from the authorities, and institutionalists are unlikely to show much interest in them.

But there are also quite respected altcoins, such asether. At the end of January, Chairman of the US Commodity Futures Committee (CFTC) Heath Tabert said that the appearance of both settlement and delivery, futures and options on ETH is a matter of near future. These derivatives will undoubtedly attract the market of new large investors.

Bitcoin ETF

First application for Bitcoin ETF (exchange-tradedan investment fund whose share price is proportional to the price of BTC) from the Winklevoss brothers was submitted to the US Securities and Exchange Commission (SEC) at the beginning of 2017, but was rejected. Since then, several more similar applications have been submitted by different issuers, but they were also rejected.

However, the authors of the applications are still looking for newopportunities to satisfy the regulator. For example, the SEC is currently considering an application from Wilshire Phoenix, which proposes a special Bitcoin fund with protection against manipulation. It is planned that this fund will consist not only of BTC, but of insurance assets, including US government bonds. During periods of sharp increases in BTC volatility, its share in the fund may decrease, and capital may be transferred to bonds. Perhaps such a hybrid instrument would suit the SEC. And this is not the only project that is under consideration.

Although today institutional people can already directly buy BTC through Bakkt and ErisX, Bitcoin ETF, as a security with the same value, retains excellent chances of success:

• Once on any major exchange, such an ETF will immediately become available to many traders who already have accounts on these exchanges;
• ETFs Eliminate Strange Controversy inthe work of American regulators: direct trading in cryptocurrencies is already available to investors, but such a compromise tool as ETF is prohibited. Its legalization will finally make BTC a recognized commodity on which there are both futures and options and tracking funds.

Bullish trend in the presence of working crypto platforms for institutional

The influx of new institutions to the cryptocurrency market in2020 will also contribute to the fact of the presence of working platforms like Bakkt in a positive market trend. This is a fundamentally new situation compared to previous years.

Last winter there was neither growth norsites like Bakkt and ErisX. Growth began in the spring, but there were still no deliverable BTC futures and options. And when they appeared in the fall, the market was already in decline.

Today, institutionalists are in the most profitablePositions: they already have a legal opportunity to buy BTC, while the cryptocurrency is just starting a new rally. In January, several factors played in favor of growth at once: the lack of sellers in the market, tensions around Iran, CME bitcoin options, coronavirus in China ... In the spring, BTC halving is expected to increase the cost of foreign exchange production and, probably, its market rate.

Are institutional crypto markets useful?

Although many crypto enthusiasts see in the wardInstitutionals are only pluses, far from all share this position. Any major players tend to manipulate the market. A significant part of their activity is occupied by high-frequency algorithmic speculations, which far from always help the growth of quotes. There are strong arguments that it was the manipulations of the institutional on CME that brought the BTC down in 2018.

But cryptocurrencies today have an important feature,allowing crypto optimists to welcome institutionalists. This is a long-term positive trend in the cryptocurrency market capitalization, associated with an increase in the number of its participants. It is thanks to him, for example, that the BTC rate in December 2019 (about $ 7000) was almost double the rate in December 2018 (about $ 3500). Any major investors and manipulators are aware of this trend and will bet on growth in the long term. In this sense, the whales and Wall Street sharks are in the same boat as regular retail investors and small crypto enthusiasts.

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