April 25, 2018 Article

Why Institutional Capital Cannot Solve the Crypto Market Volatility Problem

For years now, many conventional investors, such as endowment funds, family offices, and pension funds, have avoided investing in the cryptocurrency industry. This is due to its high volatility, a track record that is limited and lack of clear regulations to guide industry operations.

However, this is slowly changing. Earlier this month, Bloomberg reported that George Soros, the billionaire hedge fund guru, is considering crypto asset investments.


Speculative Investments

According to media reports, Soros has already authorized his family office, the Soros Fund Management, to trade in cryptos. Though the Macro Investing Head at the family office, Adam Fisher, is said to have gotten the approval, he has not made any bets on cryptos as of yet, according to Bloomberg.

Besides Soros, another ultra-wealthy family, the Rockefeller, is also eyeing the cryptocurrency market. Through its Venrock venture capital firm, the Rockefeller family is already collaborating with CoinFund investments to channel funds into the cryptocurrency space.

Following a turbulent first quarter when the cryptomarket lose almost 50% of its value, will the entry of institutional investors help in stabilizing the market? Luis Manuel Lopez, the general coordinator at WorkChain Centers, does not think so.

“The profile of these large investors does not ensure greater market stability, many of them tend to speculate and invest in the short term,” he says.


Too Early to Tell

While there are players who feel that funds flowing from institutional investors into the cryptocurrency space could help cushion the market from price volatility, others feel it is still too early to tell whether this will actually happen.

According to Ruslan Guseynov, co-founder and head of strategy & development at Soundeon, the low volatility that is characteristic of conventional industries as they mature may not necessarily be true for the cryptocurrency industry.

“Institutional investors’ entrance into cryptocurrency suggests that the market is obtaining a formal structure. Whilst traditionally, a maturing industry is correlated with reduced volatility, it is premature to suggest that this will manifest in the cryptocurrency market in the near or medium term. Crypto-community’s response to institutional investors’ market signals will be most curious to observe,” he says.

On his part, Todd Crosland, founder, and CEO of CoinZoom draws valuable lessons from history. He highlights the outcome of Bitcoin Futures where volatility was not reduced despite investments made by institutional investors.

He says, “When the CME launched its Bitcoin Futures Contract at the end of 2017, there was talk that volatility would subside. As we have seen in the months since the CME launch, that volatility has not decreased at all. I would anticipate continued volatility throughout 2018 and beyond.”


 Disclaimer: David Drake is on the advisory board for most of the firms mentioned or quoted in this article.