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 that 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 it 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 from going long, since an asset's 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 role in 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.
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