Over the past month, the cryptocurrency market has experienced one if its worst sell-offs in all of 2018 as the price of Bitcoin dropped 35 percent.
Jake Chervinsky, a government enforcement defense and securities litigation attorney at Kobre & Kim, suggested that while retail traders or individual investors are selling in the cryptocurrency exchange market, institutional investors are accumulating.
“Investors, with bitcoin trading under $4,000: Retail: ‘should I sell and buy back lower? should I open a short? should I just give up? is it going to zero? was this whole crypto thing a scam after all?’ Institutions: ‘please keep selling us cheap bitcoin. thank you.’”
Are Institutions Really Buying?
The statement of Chervinsky led to a series of debates within the cryptocurrency community, mostly triggered by skeptics who have questioned the involvement of institutional investors in the market given the lack of momentum of major digital assets.
If institutional investors have been accumulating Bitcoin over the past month, then the price of BTC should have increased rather than plummet by more than 35 percent.
Chervinsky explained that professional traders and institutional investors are highly cautious in accumulating new assets and often invest in a way that it has minimal impact on the short-term price trend of the asset or the currency.
“The problem, however, is concluding that ‘because institutional investors are buying, price will immediately go up.’ Professional traders are experts at accumulating assets without affecting the market,” said Chervinsky, adding that institutions do not take naked long positions on speculative assets like Bitcoin.
“None of the investors & traders I’ve worked with take naked long positions on speculative assets. When they buy spot, they simultaneously hedge in other markets to reduce risk. ‘Hope’ has nothing to do with it.”
Institutional investors tend to invest in speculative assets through the over-the-counter (OTC) market. In the case of Bitcoin, due to its lack of liquidity, institutional investors have to rely on trusted custodians like Coinbase Custody and Fidelity Digital Assets to purchase or sell large sums of BTC.
OTC market operators and custodial solution providers are not obliged to share their trading volumes and as a result, data held by OTC exchanges is rarely released to the public. Because of the lack of information offered by OTC exchanges, it is difficult to back up claims that institutions are accumulating BTC to a large extent.
But, as Chervinsky said, there are clues investors can consider to assume that institutional investors are investing in the asset class. Grayscale Investment reporting high inflows and university endowments like Yale taking positions could signify a growing demand for Bitcoin from the traditional financial sector.
It remains unclear whether institutions are merely interested in cryptocurrencies or are actively accumulating Bitcoin as a long-term investment.
Currently, the demand for Coinbase Custody, Bakkt, and Fidelity DIgital Assets is one of the limited ways to justify institutional demand for crypto and recently, Bakkt confirmed that the demand is growing rapidly.
Apart from that, it is difficult to quantitatively prove that institutional demand for crypto is in fact strong and that institutional investors are accumulating Bitcoin.
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