June 12, 2020 |James Messi
For any retail investor, it’s a positive sight to see institutional investors entering the crypto space. Many believe that for the crypto space to progress, widespread institutional adoption is necessary. Especially mainstream recognizable firms. Most mainstream banks and large consultancies have a blockchain department. Some even have active trading departments. All are good signs to those who wish to see the blockchain space mature.
What is an institutional investor?
An institutional investor can be seen as a group that invests money on behalf of other people. A few good examples are funds (mutual funds and hedge funds etc), pensions, and others. They handle investor’s money in the hope of delivering solid returns. Due to their size, they are able to buy many products that aren’t accessible to retail investors.
Institutional investors all have the same desire in mind, maximize returns whilst minimizing risk. However, they all have very different strategies for how to get there. Some choose to try and exploit low-risk opportunities which typically result in a small return. Others go for a more risky approach in the hope of higher returns. The differences in approaches can be caused by a number of factors, namely the risk appetite of their clients and regulatory status, to name a couple.
More and more institutional investors have decided to join the crypto space. In May 2020, PWC put out a report on crypto hedge funds and it shows the giant leap in the numbers of funds opening up as well as a leap in the total number of assets they’re holding. PWC reports that the percentage of firms with ‘Assets under management’ level of over $20M increased from 19% to 35% in a year.
What strategies do institutional investors use?
The most common investment methods used by institutional firms include arbitrage, automated or algorithmic trading, market making, and options trading. Some firms focus all of their efforts on one strategy while others implement a combination of them. Keep reading to find out more about these institutional investment strategies.
Arbitrage in the bitcoin market
In just the same way prices are different at different grocery stores for the same product, among crypto exchanges the same is true. However small, the price on Beaxy will most likely be different from the price on Binance. The price will be different on Binance to the price on Shapeshift etc. These differences are likely to be small but by buying at the underpriced exchange and selling at the overpriced exchange simultaneously, you can profit. The profits are likely to be low because others can do the same and make a relatively risk free return. Therefore, lots of starting capital is required to make the process worthwhile.
Automated trading for institutional investors
Companies exist that enable both institutional and retail investors to profit from strategies put together by professional traders. These strategies can also be ‘backtested’ to see how they’d perform under typical market conditions.
The major benefit to these automated bots is that they can perform more tasks than a human could and at a faster pace. This means that they’re able to take advantage of more profit opportunities than a human could. Additionally, they’re able to spot opportunities that would otherwise be missed. Another key factor is that they’re relatively cheap.
In this instance, the comparison is clear, cheaper than an employee whilst also being significantly more efficient. Most institutional investors are well acquainted with the practice and optimize their strategy to meet their preferences towards risk.
Some notable examples of successful automated trading companies are Autonio, CryptoHopper, HolderLab and so many more.
Market Making for Institutional Investors
On certain exchanges that experience shortages in liquidity, institutional investors can make consistent returns by offering market-making services. By placing buy and sell limit orders (orders which sit on exchange books until someone acts on them) on the books of certain assets pairs on exchanges, a market maker can ensure healthy profits. This is often carried out with the agreement of the larger exchange, perhaps with the agreement of reduced fees in order to maximize potential returns.
Options strategies for institutional investors
By using an options strategy, institutional investors can profit from various price movements or in some cases, price stagnancies. By buying a tradeable contract that expires in the future with the ability to back out of the contract, an investor can position themselves to profit from price action. For example, by buying a long call (an option that profits from price rises) and a long put (an option that profits from a price fall) an investor will profit with a sufficiently large price movement from its strike price (price when the option was opened). However, investors are required to pay a cost for these options and so can make a loss if the price doesn’t fall or rise enough.
Because it’s widely accepted that Bitcoin prices are more volatile and because they’re a new product to the blockchain space, options costs can be relatively expensive so larger price movement than in other asset classes are needed to profit.
Institutional accounts on Beaxy
Beaxy is a perfect place for institutional investors, with plenty of arbitrage and market-making opportunities. We don’t just focus on institutional investors, we value retail investors too.
Starting an account on Beaxy is a great first step. The process is simple. Simplyand fill out the form.
Once you’ve registered, complete the KYC verification process. We put a video together on how to help you. You can find that video here.
Finally, connect your bank and you are ready to make your first purchase! We hope this article has been helpful in explaining the relevance of Bitcoin to institutional investors. For any additional information you may want, don’t hesitate to contact us at support.beaxy.com