The massive 2020 crypto had been led by increased institutional money pouring into the industry. Especially if we talk about Bitcoin, there are been many funds and investors announcing massive stakes, which combined with a lower daily stock, had pushed valuations to new all-time highs. However, the implication of institutional money goes beyond the price and we would talk to analyze this topic.
# Better liquidity – lower volatility
Increased liquidity comes with multiple benefits, like accurate pricing and reduced volatility. It is worth noting that not all institutional investments went to “physical crypto”, but derivatives continue to dominate. There had been companies such as PayPal, now providing access to Bitcoin-related services, influencing how people get access to tokens, but at the same time, activity on derivatives had been on an ascending path, as well.
Bitcoin is the main beneficiary if we talk about futures contracts, but that’s about to change now that the CME wants to introduce Ether futures in February 2021. Retail traders and investors need to consider developments in these markets due to the potential effects on market valuations.
# Higher asset valuations?
Does more institutional money equal to higher valuation? That seems to be the big question. Based on what we’ve seen for the past several months, the answer could be yes, but at the same time, we shouldn’t forget that now there are trading instruments with the potential to push valuations lower, as well.
In late 2017, when Bitcoin futures were first introduced to the market, its price failed to continue rallying for more than a few weeks. What followed was a massive bear market and elevated activity in the futures sector. The sentiment is good right now and that is a reason to be hopeful, but as history thought us, things can change fast.
# New standards for crypto companies
For years the crypto industry had been accused of operating in the shadows, bypassing the regulation all the traditional financial companies are complying with. Institutions joining in is a sign that cryptocurrencies are moving towards regulatory compliance and that’s something to keep note of.
There is a strong debate on whether traditional crypto will manage to come on top over CBDCs and even though the future won’t see Bitcoin as a global currency, it is shaping up to be a reliable payment system and a store hold of wealth against the diminishing purchasing power of fiat money. Institutions buying stakes in blockchain companies will mean that new standards will be developed, with long-term implications on trust.
