Does Cryptocurrency Trading Favor Retail Investors, and If So, for How Long?

According to CoinMarketCap, as of July 24, 2018 the total market capitalization of all cryptocurrencies was just shy of $303 billion with Bitcoin’s market capitalization at $140 billion (17.1 million coins in circulation), down from a high of $828 billion and $294 billion, respectively, in early January 2018.

A recent report in the Financial Times indicates that there are approximately 1,600 individual investors (generally thought to be high net worth individuals), known as “Bitcoin whales” who hold one-third of the Bitcoins in circulation, and of those, approximately 100 investors own between 10,000 and 100,000 Bitcoin each in their wallets. Meaning, as of July 24, these 1,600 investors held $46.2 billion worth of Bitcoin. It also appears that “whales” are cropping up in other cryptocurrencies, with a small number of individual investors holding a significant percentage of the coins (Digital Trends). As a result of this concentration of holdings, these select investors have significant power to impact the price and market of that particular cryptocurrency. While the “whales” may hold a large percentage of cryptocurrencies, retail investors are also highly invested in this market.

In the world of investing, retail investors are individual investors who buy and sell securities through traditional or online brokerage firms or accounts, and now cryptocurrency exchanges. These types of investors typically invest smaller amounts of money, trade less frequently, and are viewed as lacking the expertise of professional investors. A recent Bloomberg article estimates that Bitcoin investors are predominantly male (71%) and in the age range of 18 – 34 years old (58%) and buy crypto assets as they view the crypto marketplace as more trustworthy than traditional markets and see digital coins as a potential growth investment. Additionally, most reports indicate a belief that retail investors, in conjunction with the “whales” and hedge funds, own a significant amount of cryptocurrencies and that institutional investors have yet to enter this marketplace in any noteworthy capacity.

Institutional investors are on the other side of the spectrum from retail investors. They are organizations that trade in securities in large enough quantities or dollar amounts to qualify for preferential treatment. These types of investors typically invest significant amounts of money, trade frequently on the national stock exchanges, and are viewed as having market expertise. That being said, why haven’t institutional investors entered the cryptocurrency market to take advantage of the potential upside? Some of the most often cited reasons include insufficient market capitalization, lack of clear regulations, security concerns, lack of market infrastructure, concentration of holdings by the “whales”, and extreme volatility (Bitcoin News; FinancialBuzz.com). However, the question is, will that change any time soon?

According to a recent article in FinancialBuzz.com, 2018 could be the year that institutional investors enter the cryptocurrency marketplace. There have been a number of new products released that address the market infrastructure and security issues and make it easier (and somewhat safer) for potential institutional investors to participate. Additionally, a number of crypto exchanges are embracing the concept of regulation as a way to put themselves in front of the curve in attracting institutional investors and their money, especially as the SEC and CFTC start to establish rules in this arena (American Banker; Inc.). Yet, one of the biggest impediments is market capitalization and liquidity. While a market cap of $350 billion may seem significant, the global stock markets’ capitalization exceeds $70 trillion with the derivative markets at over $500 trillion (Hackernoon). While institutional investors appear interested in the crypto market, the current capitalization (and lack of liquidity) prevents them from truly participating as the amount of money they generally invest could send shock waves through the crypto market and generate extreme price volatility (Hackernoon; Bitcoin News). This creates an added concern in a market full of retail investors as financial experts generally view retail investors as potentially undermining the market as a result of their behavioral biases and inclination to engage in panic selling, which could cause even greater volatility. This retail investor-caused volatility was evidenced in late 2017 when Bitcoin lost significant value after one of the “whales” moved his Bitcoins to various exchanges and made public comments about Bitcoin and its viability, which resulted in a rash of Bitcoin sales (Digital Trends). That is likely top-of-mind for institutional investors as they examine the ways in which they might enter the crypto market.

Yet, the consensus is that while most institutional investors are still sitting on the sidelines, that will not last for long as advances are made on many of the issues and concerns keeping them on the bench (Hackernoon; Bitcoin News). If, or when, that occurs, future retail investors may find themselves locked out or limited in the crypto market with new coin and token issuances going into the hands of institutional investors, much like the traditional stock markets.