May 9, 2018 Article

Will Institutional Capital Reduce High Volatility in the Crypto Market?

Over the last few weeks, institutional investors have turned their attention to the cryptocurrency market. In the UK, Barclays PLC announced it is gauging the market to determine whether it will set up a digital trading desk to assist institutional investors purchase digital assets.

This is perhaps the most notable step that a financial institution has taken that points to an increasing flow of institutional capital in the cryptocurrency industry. In the US, billionaire George Soros made headlines when he gave his family office permission to invest in digital assets. Another notable investor, Venrock Capital, a venture capital firm linked to the Rockefeller family, is working with CoinFund Investments to invest in cryptos.


Investor Confidence

This flow of institutional capital into the cryptocurrency space is significant because of the experience institutional investors bring to the market. Their presence in the cryptomarket is likely to boost investor confidence according to Vincent Lim, CEO of Fanfare Global.

He says, “Built over decades of solid track record, institutional investors have earned a reputation of trust and foresight in the traditional stock and investment markets. In fact, the world watches and moves along with the big players. So, with institutional investors entering into the crypto market, it’s like giving cryptocurrencies a big booster shot and invigorating their values. Their presence will definitely build more confidence to invest in cryptocurrency, and help drive even more individual investors into this marketplace.”


Taming Volatility

Even so, there have been questions on whether the flow of money from institutional investors will help reduce the high volatility that has characterised the crypto market. According to Denis Farnosov, the founder of AlfaToken, the experience and credibility of institutional investors will help reduce market volatility in a significant way.

He says, “As traditional money managers enter the sector they bring credibility, track record and best practices for managing volatility. The cryptocurrency and blockchain market is young and evolving. A larger number of institutional and venture capital investors participating is encouraging for the sector. This can result in greater interest, media attention and confidence which is key to reducing volatility.”

On his part, Kyle Sonlin, chief operating officer of FryEgg, observes that the presence of institutional investors in the crypto market will help shift attention from short term gains to long term strategies.

He says, “Additional capital bolstering support in the market will assist in soothing volatility. As institutions financially back projects, investor mindset will likely shift from short term speculation to a longer term strategy revolving around investing in legitimate products. I expect to see much less fear in the market and more confidence in great successful businesses. As these tokens become used in their ecosystems, demand for all tokens will increase, anchoring prices to the value they provide in their system. It is an exciting time to see the developments in the space and how many innovative projects and ideas from the last few years can implement their solutions improve all aspects in our daily lives.”

While it is evident that institutional capital entering the crypto space will go a long way in taming volatility, Lim feels that the focus should not remain on volatility. On the contrary, investors need to focus more on the robust power of blockchain in increasing the value of cryptocurrencies.

“Personally, I feel investors shouldn’t just focus on the market volatility, but rather on the robustness of the blockchain-powered companies driving the value of the cryptocurrencies. History has shown that various stock markets have crashed numerous times in the past, but companies have weathered the storm and emerged stronger. Market volatility does not define the strength of blockchain technology and cryptocurrency. I think the cryptocurrency volatility could still continue as investors navigate their way through this market,” he adds.

 

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