Our institutional crypto trader avoided saying too much in particular when it comes to trading or business strategies but if you piece the answers together they do give some insights.
About the trader
The trader works for an institution that deals mainly with cryptocurrencies but has background in legacy finance. It was not possible to state which company it is but the identity was verified by r/BitcoinMarkets admins through government ID and pay slip.
From what we know this particular institution trades Bitcoin and top 10 altcoins, occasionally venturing into some of the top 100 cryptocurrencies if their risk management shows there is a good opportunity.
Also, for what it’s worth, the trader speaks in British English but claims to work in the US.
What trading strategies does this institution use?
There is a mix of short term and long term strategies, as one would expect from a well rounded institution.
Cryptocurrencies are all in all an extremely new instrument so the emphasis is on risk management. The fact that crypto is a new asset is not by itself an issue, there are ways to trade with that information.
Is there any demand for altcoins?
Small cap cryptocoins are riskier than Bitcoin but there is still some demand. The belief is a small investment can in the future blow up so according to the trader, investors approach this in a way similar to penny stock trading.
That said, the interest is waning out as the downtrend in cryptocurrency markets continues.
From investors’ point of view there is not much interest in the technology side.
What kind of institutions are involved?
From the trader’s direct answer it seems the blockchain space is undergoing a transformation at the moment:
- On one hand there are small funds that invested in cryptocurrencies extremely early and have been cashing out for some time.
- On the other hand there is also demand from new blockchain-related businesses that need to get started.
- From other answers, there are also institutions that are interested in a crypto investment as a form of diversification.
What are the bottlenecks that prevent institutions from entering the cryptocurrency space?
Institutional investors need to have a clearer framework of what is allowed and what exactly are the rules of dealing with cryptocurrencies. There is not fundamentally an issue with cryptocurrencies being a risky investment, the community proved that there is a lot of interest and demand even in spite of popular skepticism.
The real problem is lack of clear regulatory guidelines: Institutions don’t know the rules of the game so to speak. This gives the impression that institutional investors see cryptocurrencies as something that has value but the expression of the value is suppressed. Our trader directly admits “there is a ton of edge in crypto now”.
On the “security token” news:
Recently there was some buzz around the new concept of security tokens, some literally claimed it may be the next big thing.
The AMA seconds this sentiment, relating it to the regulatory bottlenecks: The decision to label specific coins a security or a commodity is important because it gives at least a hint of framework.
With the label it is clearer for institutions how to deal with specific cryptocurrencies.
What are some other crypto business insights?
The demand for service industry in the blockchain space is strong at the moment, especially in the legal side of things such as KYC/AML and legal issues.
Security is the second big point, nobody in the investment business understands the infrastructure necessary to hold cryptocurrencies and there is not enough reputed experts for hire as in-house staff on the market at the moment.
The businesses that capitalize on this situation are companies that offer outsourced cryptocurrency storage as a service and charge “outrageous amounts (Coinbase charges 120 bps!)” but as of now there is no better alternative.
In general, there is a shortage on people who actually know how to run a business from the mid-office standpoint.
Any segments of cryptocurrency trading space to watch?
The trader emphasized the importance of OTC markets a lot. Over-the-counter is a market that has been growing substantially and stayed somewhat under the radar for many retail crypto investors as people mostly look at trading platforms volumes.
Volumes for OTC desks are mostly not public anyway, although these services are available through mainstream exchanges too (Bitfinex, Kraken, CEX). The closest representation to this is LocalBitcoins activity and volumes of similar p2p trading services such as LocalEthereum or Bisq but these places serve retail customers only.
There is a regulatory hurdle with trading OTC for institutions because in peer-to-peer transaction the possibility is there to be accused of laundering money simply because there is no clear legal framework for this business.
Is the BTC ETF going to be approved any time soon?
This was an obvious one, and obviously nobody knows.
The closest decision point from the date of the AMA being 10th August 2018, the expectations are low for this one. There is still the option to put off the decision to a later date and that is what is expected to happen.
What will be the impact of the Bitcoin ETF approval, when it happens?
The sentiment is that the approval will be a major event in both institutional and retail space.
For institutions this will open up a pathway to invest in Bitcoin through an instrument that is regulated and the rules of how to use it is absolutely clear. This should bring a lot of new business to the institutional sphere.
Because there is interest in alternative cryptocurrencies too, it is expected there will be altcoin ETFs after Bitcoin as well.
In retail markets the ETF approval would result in a lot more trust in the future of cryptocurrency space. It is likely we would see trading volumes increase substantially.
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