Institutional investors have been one of the driving forces behind the crypto markets during the last major bull run, and they could be even more so by 2024.
With institutional investors, we mean all large professional investors who do not belong to the retail investor category.
Specifically, retail investors refer to individual private citizens who invest on their own behalf, while institutional investors are companies or organizations that generally invest on behalf of others.
Among the most important institutional investors are pension funds, banks, mutual funds, hedge funds, and insurance companies.
From this definition, it is also evident that institutional investors are investors who invest large amounts of capital, while in most cases retail investors invest smaller amounts.
Summary
The last bull run
The first derivative products that allowed taking a position on the price of cryptocurrencies on traditional exchanges were the futures launched in December 2017 on the CME and Cboe.
However, those derivatives were not able to attract large amounts of capital. At the time, in 2018 and 2019, institutional investors were still largely unfamiliar with the crypto markets, and despite having derivative products available on exchanges where they already operated extensively (particularly the CME in Chicago), they were not very attracted to these new digital assets.
The turning point came in 2020, both because Bitcoin and crypto’s response to the financial market crash in March was excellent, and because in May there was the third BTC halving.
However, it should be emphasized that the presence of institutional investors in the crypto markets, or in the crypto derivatives market, in 2020 was not massive.
It was only a first entry that probably already allowed the start of a new great bull run by the end of the year, after the one in 2013 and the one in 2017.
However, the 2021 bull run was characterized by relatively minor increases in the price of Bitcoin, and by far higher percentage increases in memecoins and smaller altcoins.
Since institutional investors are not interested in smaller assets with limited trading volumes, the success of memecoins and shitcoins in 2021 was largely due to retail investors.
2024: the year of institutional investors in the crypto world?
It is expected that this framework may change during 2024.
In fact, the launch in the USA of derivative products such as Bitcoin spot ETFs could finally allow institutions to invest directly in a derivative that represents 100% BTC.
The Bitcoin ETFs already available on the US market are collateralized in futures contracts, meaning they are speculative instruments and not investment tools.
Instead, the new ETFs that are expected to be launched in January will be collateralized in BTC, and in fact will perfectly represent Bitcoin on traditional exchanges.
The landing of Bitcoin on Nasdaq, albeit through a derivative, should allow institutional investors to invest in BTC almost as if they were directly purchasing tokens on the crypto spot markets, but without the custody issues and on platforms that are already in use.
Forecasts on the impact of institutional investors on the crypto market in 2024
According to several crypto analysts, institutional investors in 2024 will end up showing more interest and being more actively involved in the crypto market.
This forecast does not only derive from the consideration that Bitcoin spot ETFs will arrive on traditional US stock exchanges, but also from the hypothesis that the Fed will start a campaign of interest rate cuts and from a possible increase in regulatory clarity.
Actually, according to what was revealed by Deribit’s Chief Commercial Officer, Luuk Strijers, the data from their platform for crypto derivatives trading would show an increase in institutional investor activity starting from October.
October has been the month of the awakening of the crypto market, with, for example, the price of Bitcoin finally breaking free from the sideways range around $27,000 that had held since March.
This awakening of the crypto markets, combined with the increasing optimism for the approval of ETFs, has also attracted the interest of institutional investors, who are already preparing for greater involvement in this market in 2024.
According to Luuk, this trend would be driven on one hand by the anticipation of potential news about ETFs expected in January, and on the other hand by strategic positioning by clients for this specific event.
The wait for the interest rate cut
Together with the approval of Bitcoin spot ETFs, the hypothesis that the Fed will start an interest rate cut campaign as early as March is contributing significantly to this repositioning.
According to the markets, there is currently less than a 20% probability that the Fed will not cut rates in March, with even a 0.3% probability that rates will still be at their current level in May.
Furthermore, they hypothesize that there is more than an 80% probability that a second interest rate cut will occur in May, following the one in March.
According to market bets, by the end of 2024 interest rates could have dropped to 400 points, from the current 550, with six cuts of 25 points or three cuts of 50 (or a mix).
According to analysts at crypto exchange Bitfinex, this scenario would encourage institutional investors to increase their risk appetite during 2024.
If retailers often have a greater propensity for risk, sometimes even exaggerated, institutional investors instead are always much more cautious and prefer to flee from risk in periods of uncertainty.
A return to their risk appetite would actually constitute a sort of epochal shift, or a real turning point compared to what has happened in the last two years.
A certain framework seems to suggest quite clearly that 2024 could prove to be an interesting year for crypto markets.
