Crypto says institutions are back, though retail investors have cold feet

The BlackRock-Coinbase deal has been described as consequential by many. PHOTO: REUTERS

NEW YORK (BLOOMBERG) - An old adage is making the rounds once again in the crypto sphere: Institutional investors are back.

BlackRock's partnership with Coinbase Global to make it easier for institutional investors to manage and trade Bitcoin was followed by another announcement that the asset manager is offering its first-ever investment product directly in the token. Meanwhile, hedge fund firm Brevan Howard raised more than US$1 billion (S$1.37 billion) for a crypto fund.

Thus, the return of the narrative: Big-money investors are besotted by the space and are finding ways to be involved. It is all happening as crypto prices show some signs of recovery, with Bitcoin adding 20 per cent over the past month and Ether advancing 80 per cent.

Bitcoin's rally "may be attributed to the recent optimistic headlines on continued institutional adoption of crypto", wrote analysts at BlockFi in a note. Another by Coinbase, citing the BlackRock news, said "major multinational firms are making moves amid the crypto downturn".

Yet, retail investors, the lifeblood of the crypto sphere, have been more hesitant to jump back in. Wounds from Bitcoin's 70 per cent plunge since its November highs of around US$69,000 are still fresh. Coinbase said as part of its second-quarter earnings announcement that its core retail customer has been less active and is sitting on the sidelines. The exchange booked a record US$1.1 billion loss for the quarter.

"That is part of the issue - for it to succeed or to succeed further, I think it has to have more of a networking effect," Mr Marc Chandler, chief market strategist at Bannockburn Global Forex, said of crypto. "It has got to have more people participate in it."

Institutional investment in the digital asset space has always been a complex topic. This is because it did not materialise for a long time - during crypto's early days, most institutions steered clear - and was then, also for a long time, marketed as something that would help bring legitimacy and maturity to the industry. Still, a slew of big-money firms did enter during the pandemic, with many going all-in on blockchain technology and others looking to profit off the stellar gains that cryptos booked during that stretch.

The BlackRock-Coinbase deal has been described as consequential by many, though it has not acted as a catalyst to push prices higher more meaningfully.

Still, "this is a big deal because it shows that institutional interest in digital assets is far from waning despite what we are seeing in the markets", Ms Leah Wald, chief executive at digital asset investment manager Valkyrie Funds, said on Bloomberg TV. "BlackRock really would not be doing this if there wasn't significant demand from both institutional and retail clients."

The BlackRock announcement shows a major institution linking up with a crypto firm to provide all manner of services to their institutional investors, though it will take more than one or two announcements to show real institutional engagement, according to Mr James Malcolm, head of foreign exchange and crypto research at UBS.

"The hope is that at some point in the future, institutions will come into the space, institutional adoption will pick up a lot and it will start to look more like traditional financial markets," he said in an interview.

But he added that "this is still predominantly a retail-driven market", and that cohort will come back when there is a sense that a bottom has definitely been reached.

Small on-chain transactions, meaning those of less than US$1,000, are hovering around their year-to-date average, though the mean transaction size has been increasing, according to Ms Noelle Acheson, head of market insights at Genesis, who compiled Coin Metrics data.

Meanwhile, the amount of Bitcoin held in small addresses - those with less than one coin - is climbing at a fast pace, Glassnode data shows.

"This suggests that retail is participating, just not yet in the kind of size that would add more momentum to the overall market," Ms Acheson said.

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