By Jay Derenthal
International research company TABB Group has released a report entitled “Crypto Trading: Platforms Target Institutional Market” that concludes that the Bitcoin over-the-counter (OTC) market is three times larger than the exchange market. Whereas the global exchange market processes around $4 billion worth of bitcoin trades per day, TABB’s assessment is that the OTC market processes $12 billion worth of bitcoin trades daily.
Where the Whales Swim
Compared with traditional markets like U.S. equities, crypto markets are shallow and asset ownership is concentrated. The majority of the $12 billion daily bitcoin OTC trading is done by large individual holders, known as “whales,” who can move the market for profit.
For example, whales could sell $200 million worth of bitcoin to move the spot price down to meet the price of their futures contracts. A similar sale on an exchange would crash the market and unduly damage investor confidence, as there would not be enough buy orders to liquidate such a large sell order. Selling the same amount OTC pushes the price of bitcoin down more gently and controllably, with little long-term damage to a market where the whale wants to continue swimming.
Many analysts attributed bitcoin's price drop of $500 on August 8 (when it moved from $8,300 to $7,800) to the market's reaction to the U.S. Securities and Exchange Commission’s (SEC) rejection of the Winklevoss twins’ bitcoin exchange-traded fund (ETF). But the sheer size of the drop suggests that there were also sell-offs by whales planned independently of the outcome of the SEC announcement. The coincidence of the SEC decision may have merely amplified the effect.
Institutional Money Will Rebuff the Whales and Lift the Market
In the same report, Tabb Group concluded that institutional capital investment in cryptocurrencies from institutions currently waiting on the sidelines, including hedge funds and pensions, will likely go from a trickle to a torrent, perhaps altering the course of any current market decline.
The impending inflow of institutional money is expected to reduce and eventually eliminate the whales’ ability to profit via price manipulation. Bitcoin distribution will become less concentrated and liquidity will improve as market cap swells, impeding the whales’ ability to impact the market.
The Tabb Group report shows that huge sums of capital are being amassed as institutions put cryptocurrency market entrance criteria into place. Ongoing improvements in the following three areas are setting the table for big money to flow in:
- Regulatory clarity: Cryptocurrencies are largely unregulated, but the SEC, Department of Justice, and Commodity Futures Trading Commission are preparing to roll out a regulatory framework.
- Institutional grade data: There are no rules about what data must be reported. Some data reporting rules are expected to be in place sometime in 2019.
- Enterprise-ready infrastructure: There is a dearth of brokers and custodians, though many of these entities are forming now.
Triad Securities recently conducted and published a survey of institutional investors entitled “July 2018 Crypto Survey Results” that found that 62 percent of institutional investors were considering buying bitcoin. A plurality of survey respondents felt that the biggest issue preventing crypto assets from becoming a mainstream investment product is a lack of regulated custody solutions.
The entrance of traditional global custodians into cryptocurrency markets is expected to increase the volume of institutional investment. The survey reveals a general sentiment in the world's securities markets that cryptocurrencies are a new asset class opportunity with exceptional revenue potential.
Recent Events Portending an Inflow of Institutional Money
- Cryptocurrency trading companies, including Coinbase, Ledger and Circle, are preparing to solicit cold wallet custodian agreements with financial institutions.
- On Wall Street, The Bank of New York Mellon Corporation, Northern Trust and JPMorgan are exploring cryptocurrency custodial and trading services.
- Coinbase has received regulatory approval from the SEC to operate its custody service.
- Investment bank Nomura Holdings Inc. co-founded the Komainu custody consortium with Ledger and Global Advisors.
- Funds with trillions of dollars under management, including Fidelity and BlackRock, are in the process of hiring cryptocurrency traders who will then work with any trading platforms that gain SEC approval.
- Goldman Sachs opened bitcoin trading operations.
Institutional Money May Trigger the Next Bitcoin Parabolic
The addition of a few more cryptocurrency custodian services from traditional global custodians should increase the volume of institutional investor trading enough to prevent the whales from manipulating the market. When this happens, we may enter another period of rapidly increasing valuations of the major cryptocurrencies.