Bakkt Bitcoin Futures
Bakkt Exchange recently rolled out which many Bitcoin enthusiasts viewed as a large catalyst. Many investors thought this would result in “large whales” entering the market from the get go. Of course, this was the complete opposite following the Bakkt launch. Daily trading volume has been decreasing since 9/27/19, and only a small amount of activity is occurring. You can see the chart below which is being tracked by “Bakkt Volume Bot.” We have mentioned from the beginning that we see Bakkt being a large catalyst, but it will take time to mature. The way we think of Bakkt and Bitcoin is like a traditional IPO. In the stock market, initial price offerings are always overhyped before companies start trading. Eventually some IPOs gain traction when many aren’t expecting it. We think the same thing will occur with Bitcoin and Bakkt. Now that institutional framework is in place, you will slowly see big players enter the market as regulatory clarity continues to move forward. It’s not something that will happen overnight like many anticipated in our opinion.
Tom Lee Bitcoin Overview
In a recent interview, the Managing Partner and Head of Research at Fundstrat Global Advisor gave his opinion on why institutional investors were hesitant to enter the crypto space. In his opinion, the main reason why institutions did not seem to have much of an interest in the crypto sector was due to size.
Tom Lee believes that the crypto market is just too small. As a result, most institutional investors consider it a hobby. He gave the example of the gold market, which was worth about $9 trillion and the bond market, which was worth $86 trillion. To put things in perspective, the entire crypto market is worth around $200 billion. However, this is not the only factor keeping institutional investors out of the crypto market. Here are some of the other important factors:
Lack of Regulatory Clarity
Globally, the crypto market is largely unregulated. For instance, there is no regulation at the federal level in the US that covers the crypto market. As a result, various regulatory frameworks have been created in various states in the US, which are not always coordinated with each other. For a major firm that operates globally, this prevents an unnecessary risk to their legal standing. Only institutions such as the SEC have stamped their authority in the sector to some degree. For instance, the SEC rules that BTC and ETH are not securities. However, a major institution could still find itself in trouble for investing in a crypto platform that supports other tokens considered securities. This becomes a large issue when institutions are managing money for thousands of clients. Yes Bitcoin may offer a portfolio hedge, but does that hedge really matter if it runs the risk of being tackled by regulators?
The Stock Market is Doing Quite Well
One other factor that is keeping institutional investors out of the crypto market is that the stock market is doing quite well. In the past few months, the stock market has reached some historical highs. AS a result, institutional investors are doing quite well right now. The result is that there is not much incentive to seek out other non-traditional markets.
Lack of Certainty on Crypto Custody
While matters of crypto custody have progressed a lot in the past few years, there is still not enough clarity to keep institutional investors happy. Institutions are not happy about placing their crypto assets in the hands of crypto exchanges. This is especially so considering that various crypto exchanges have lost funds worth billions of dollars in the past few years. Most institutional investors want to be assured that their funds are secured and insured. Today, the few exchanges that have insured their cryptocurrency assets only do so for a few hundred million dollars.
Lack of Liquidity
Major institutions love liquidity, they want to be able to get in and out of positions at the first sign that things are not going well. However, this is lacking in the crypto market. For instance, the New York Stock Exchange has daily liquidity of about $50 billion. The liquidity of the crypto market is a drop in the bucket compared to liquidity at stock exchanges and the Forex market.
Summary
These are some of the biggest challenges keeping institutions out of the crypto market. Most of these issues above been ongoing problems for some time now. It’s still uncertain how long it will take for these issues to be corrected, and for institutional comfort to settle in. However, some institutions have chosen to join the market despite the challenges. Depending on how that works out for them, others could join the market in the future.
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