With so many people involved in crypto trading these days, it is important to understand that not all investors are the same.
In this article we will outline the difference between retail investors and institutional investors regarding cryptocurrency investing.
Retail investors are private individuals that invest their own capital into assets. They are not professional investors.
Over the past decade, retail investing has changed a lot. In the past, an average investor would have to hire a financial advisor who could place trades on their behalf.
However today, the stock and crypto markets are easily accessible by everyone via trading apps and crypto exchanges.
While they do not have access to institutional level information and research, retail investors often have access to the same trading technologies and strategies as professional institutional investors. For instance, retail traders can use margin accounts to magnify their returns — just like hedge funds do.
Regarding retail investing, cryptocurrency investors have some advantages over stock market investors. For one, the cryptocurrency markets are open 24/7 — they never close — whereas the stock markets only trade during business hours.
Also, retail investors in the stock market can only buy into IPOs if they are considered an “accredited investor,” meaning their net worth exceeds $1 million — whereas crypto investors can easily invest in new ICOs (initial coin offerings) without any restrictions.
In contrast, institutional investors are institutions with substantial amounts of capital available that invest money on behalf of other people. Most institutional investors are regulated and have a fiduciary duty to their investors, meaning they must act in the best interest of the investor.
These institutions often have teams dedicated to analyzing private deals, using a wide range of tools and resources before making an investment decision.
A few examples of institutional investors include banks, retirement funds, insurance companies and hedge funds. While the crypto market is growing rapidly, there are still relatively few institutional investors that have entered the space. They usually are not allowed to invest in crypto because it is not considered a “traditional investment asset class” by regulators.
Cryptocurrency exchanges are the most obvious type of institutional investors in crypto, and the most well-known. They have the largest reserves of crypto, including 13% of the entire Bitcoin supply, allowing people to buy and sell cryptocurrencies for fiat currencies like USD or EUR, as well as for other cryptocurrencies.
The top 10 crypto exchange process a combined $100 billion in trades every day.
Many new cryptocurrencies are launched without an initial exchange listing, but getting a cryptocurrency listed on an exchange is considered bullish by many people because exchanges have thousands of users with assets to invest in new tokens.
Crypto funds are institutional investors that invest in cryptocurrencies early on, raising venture rounds for new projects and providing other investment services such as asset management.
Some institutional investors have hundreds of thousands of Bitcoins, Ethereum and other cryptos under management. They help launch new projects by financing them through private sales at a lower price than the launch price on an exchange or even in an Initial Coin Offering.
Some of the biggest crypto funds are: Digital Currency Group (DGC), Pantera Capital, Andreesen Horowitz (a16z) and Polychain Capital.
New developments such as institutional-grade deFi products and services are made to attract classic institutional investors to invest in crypto.
Although, the US Securities and Exchange Commission (SEC) remain the biggest obstacle to Wall Street institutional investments in crypto, because of its regulations.
The Winklevoss twins tried to launch a Bitcoin ETF back in 2013, but they were refused. Most Wall Street institutional investors do not hold BTC itself but trade futures.
There is only one Bitcoin ETF trading on Wall Street now, and that is the ProShares ETF. VanEck, a New York-based asset management company, also filed for a Bitcoin ETF.
Institutions have access to more capital than retail investors, this being the primary and most obvious differentiator.
Because of this, they are often called “whales”, as their investment has a real impact on the market’s prices and liquidity. Institutional investors are in a different class entirely, with billions under management.
Retail investors tend to be more emotional than institutional investors, which affects their buying decisions and ability to make good trades. They do not have a long-term strategy and most of them see cryptocurrency as a speculation opportunity rather than a good asset for their portfolio on the long run.
Institutional investors have access to sophisticated analytics, advanced trading strategies and the best financial research available. This enables them to make better-informed trades than their retail counterparts.
Attitude towards risk
Institutional investors are more risk-averse than individuals and take a more cautious approach to investing, as they are managing someone else’s money — not their own.
Although both retail and institutional investors take on some level of risk, average institutional investment strategies involve less risk and a longer timeframe than typical retail choices, trading large positions over time according to their risk profile and expected returns.