Skip to main content

Fully Invested, Always Long? Big Money Might Be Changing the Crypto Market

As institutional investors pile into the cryptocurrency space, they may be altering the underlying dynamics of the market itself.
By virtue of buying in, institutional investors are pushing prices up, and that's likely to continue as these investors place bets in a way that furthers an already bullish cycle many have labeled a bubble.
Bearing mountains of cash and a mindset unlike retail investors, crypto hedge funds are being directed to invest all (or most) of their cash. And without sophisticated mechanisms for shorting cryptocurrencies, retail investors have limited options and excessive risk in betting on price decreases.
Matthew Goetz, co-founder of new cryptocurrency fund BlockTower Capital, affirmed the impact of this buying pressure is likely to continue to mean the cryptocurrency market doesn't behave like those of more mature assets.
Goetz told CoinDesk:
"As more capital comes in the space, from a market structure standpoint, whether it's funds or some other structure, that will likely be a bullish catalyst for prices."
And Goetz, who worked for more than a decade at Goldman Sachs, has no doubt the more capital will come.
"I think the space is going to continue to get more competitive, because people are seeing the opportunity set," he said.
The bullish comments were echoed by Thomas Kineshanko, co-founder of Protos Cryptocurrency Asset Management, who believes the mechanisms at play are working to push cryptocurrency prices skyward even more.
"Given the total market cap of cryptocurrency of say $150 billion on any given day, and then you add say a billion dollars, prices are going to rise.  So yes, the money coming in to the market is going to raise prices – as long as there's not any major sell-off," Kineshanko told CoinDesk.

Short trading challenges

But institutional investors aren't betting on major sell-offs, primarily because shorting is still an underdeveloped mechanism in the cryptocurrency market.
"The only thing you can't do right now very efficiently [in cryptocurrency] is short assets," said Philipp Kallerhoff, who runs trading at Protos.
He went on to draw a direct line between these difficulties and the upward pressure on their prices, stating:
"There's momentum and pressure on the long side."
BlockTower's Goetz expressed similar concerns, saying that while shorting cryptocurrency is possible, it's very risky so must be approached "very selectively and very cautiously."
Diving further into the claim, when investors short an asset, they're expecting to buy at a lower price in the future, but this means investors are exposed to a theoretically unlimited downside risk, since increases to the price could be boundless.
This is far different than going long, since an assets price can only drop so much – to zero – from the price it's currently at.
With that, in today's markets it would take a great deal of nerve to short cryptocurrency.

Fully invested – or not?

Not only will institutional investors be unlikely to short cryptocurrencies, but the primary driver of staying fully invested is also pushing prices higher.
"People don't want to pay you for holding cash," Protos' Kallerhoff said.
In traditional markets, hedging mechanisms – like highly liquid derivatives markets – are used to manage the risk of being fully invested. In the cryptocurrency space, investing fully in the markets would add additional upward pressure on prices.
Because cryptocurrency markets don't have many of the hedging mechanisms, cash takes on that risk mitigation.
"I can't speak for other managers," Goetz told CoinDesk, "but this asset class is so volatile, that in order to invest you need to invest [in] holding some amount of cash. Cash is the main risk management tool available in this space."
Timothy Enneking, managing director at Crypto Asset Management, echoed Goetz's caution:
"When we don't have a good feel for the direction the market is going to take in a given strategy, we usually pull a large percentage of the positions out of crypto and into fiat. Safer to wait for a sense of what's going to happen there than in crypto."
The result is that, while not quite the Wild West, the crypto asset class still has a long way to go before it behaves in a way familiar to the mainstream.

Comments

Popular posts from this blog

Duncan Logan just tweeted that he's on board Electroneum

I have been a buyer and holder of bitcoin and Etherreum for a long time but this will be the first ICO I buy into--Duncan Logan.

What is Electroneum?

Electroneum (ETN) is a cryptocurrency that can be mined with a smartphone, requiring almost no technical knowledge or prior experience. This sets it apart from other cryptocurrencies (like Bitcoin) which require expensive hardware and technical know-how to mine.
Electroneum’s unique mobile mining experience allows anyone with a smartphone to earn ETN coins by letting the miner app run in the background.
It was designed specifically with mobile users in mind, thereby appealing to a potential market of 2.2 billion smartphone users around the world. Unlike other cryptocurrencies, Electroneum has a user-friendly, beginner-oriented interface that allows users to seamlessly transfer ETN coins between one another, check their balances, and mine coins.
Being a cryptocurrency, Electroneum is created, held, and spent electronically, and has no phy…

Is Bitcoin Legal?

Bitcoin is of interest to law enforcement agencies, tax authorities, and legal regulators, all of which are trying to understand how the cryptocurrency fits into existing frameworks. The legality of your bitcoin activities will depend on who you are, where you live, and what you are doing with it. Bitcoin has proven to be a contentious issue for regulators and law enforcers, both of which have targeted the digital currency in an attempt to control its use. We are still early on in the game, and many legal authorities are still struggling to understand the cryptocurrency, let alone make laws around it. Amid all this uncertainty, one question stands out: is bitcoin legal? The answer is, yes, depending on what you’re doing with it. Read on for our guide to the complex legal landscape surrounding bitcoin. Most of the discussion concerns the US, where many of the legal dramas are currently playing out. Alternatively, you can access our comprehensive Regulation Report for worldwide expert …

Suddenly, Bitcoin to Be Officially Legal in India

Leading Bitcoin exchange Zebpay has revealed that the Indian government committee has ruled in favor of regulating Bitcoin. On April 14, Cointelegraph reported that the Inter-Disciplinary Committee within India’s Ministry of Finance was actively investigating the legal status of Bitcoin and considering the possibility of regulating the market. Efforts of Indian Bitcoin exchanges Over the past three years, the big three Indian Bitcoin exchanges including ZebpayCoinsecureand Unocoin operated with self-regulated trading platforms with strict Know Your Customer (KYC) and anti-money laundering systems in place, despite the lack of regulations in the digital currency industry and market. The efforts of the Bitcoin exchanges in India to self-regulate the market allowed the Indian government to reconsider the Bitcoin and digital currency sectors, regardless of the criticisms by several politicians that significantly lack knowledge in cryptocurrency. On March 24, Cointelegraph reported that…