As institutional finance pile into digital assets with specialist cryptocurrency trading desks, can they compete with the wisdom and madness of crowds

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To say that cryptocurrency is having a moment would be as much of an understatement as saying this asset class, created way back in 2009, has had an ambiguous and volatile history.

So why, as Bitcoin (BTC) and its now hundreds of lesser-known brethren (Alternative coins aka ALTs) seem to create and destroy wealth at an unrelenting pace while attracting the scrutiny of regulators the world over, why do some of the biggest names in global banking finally want in on the action?

In a word, “growth.” The global Cryptocurrency Market is expected to grow at a compound annual growth rate (CAGR) of 30% from 2019 to 2026.

Among the flurry of reaction to Bitcoin from financial institutions recently in the news, you have Deutsche Bank stating, BTC’s trillion-dollar market capitalisation has made it “too important to ignore.”

JPMorgan Chase says that retail traders are flocking to buy BTC from mainstream fintech firms. Their data suggests that consumers have purchased more than 187,000 BTC from the likes of PayPal and Square this quarter, outstripping institutions, which have snapped up 173,000 BTC during the same period.

With BTC hovering near $55k, the FOMO (Fear of Missing Out) grows stronger by the day, so what has been holding back some institutional trading firms from setting up Crypto trading desks?

To start, during its’ short history, the digital assets sector has been rife with characters operating at the edges of finance and the law and accused of everything from security breaches to technology issues to money laundering.

But the challenge, one in my view that stands out above others as a reason for caution – is unchecked market manipulation and borderline market abuse from Internet groups and social media influencers who remain largely outside of the grasp of regulators causing massive volatility.

Just one example of how easily external forces can influence crypto markets is Twitter. Tesla chief Elon Musk’s tweets have the capacity to move markets. His Tweets have led directly to multiple spikes in the price of Cryptocurrency. DOGE coin experienced a 35% jump in less than 24 hours after he posted about it.

In light of this, institutional traders are finding that managing their positions and risk in Crypto is unlike any other asset classes. In traditional assets classes, access to proper technical analysis, real-time market data and the benefit of powerful networks that can execute trades at the speed of light, all backed up by strong regulatory environments give them a built-in advantage over retail traders.

And it’s not only Cryptocurrencies seeing organised collective action disrupting markets. As we recently witnessed with GameStop and Reddit’s WallStreetBets, the havoc that can happen when you mix retail and institutional investors with the unregulated worlds of the Internet and social media is impossible to contain. All while lockdowns, stimulus checks and zero-commission trading platforms all played their part, the growing influence of populist activity in the global capital markets suggests institutional firms will need to get used to the day trader crowd and their influence on the markets.

Besides, Blockchain isn’t going anywhere. While these events have brought up serious questions about regulation and future oversight, the potential for profits, however great the volatility and risk, are almost too large for the big boys to ignore.

But can regulated financial services firms position for success while protecting themselves when they are up against forces that fall outside of traditional regulatory oversight and when the unpredictable currents of sentiment and social media trump traditional market drivers? Or will the combination of a rising class of non-professional traders, social media and blockchain and other technologies prove to be too much for the institutional financial community?

Only time will tell.

Key Takeaways

  • Getting Educated – Courses on cryptocurrency are offered at universities and by various online educators
  • Regulatory Status – Crypto is lightly regulated and at best a patchwork varying from country to country
  • Research & Analysis – In its’ infancy, crypto experts are combining traditional analysis with sentiment analysis
  • Market Data – Social forums and media are still a dominant source of market insight for Crypto
  • Risk Management – Despite digital assets novelty, principles of traditional risk management still apply

Disclaimer – This Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Values correct as of April 2021.

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