Over recent months, the cryptocurrency markets have been undergoing a period of unprecedented growth. Even despite short periods of pullback, Bitcoin appears to have found solid support at the $50,000 mark, with a market cap hovering around $1 trillion. There’s plenty of speculation it could go higher.
The broad consensus is that the current bullish trend is buoyed by institutional involvement in cryptocurrencies. Thanks to a combination of improved regulatory clarity, and the entry of some of the biggest global banks and financial firms, professional money is now flooding in as institutions aim to capture some of the growing value. Part of the reason this is now possible is the pace of development over recent years. Unlike the 2017 bull run, professional investors now have access to a range of services and financial instruments that simply weren’t available a few years back.
However, even seasoned financiers are still likely to find that the cryptocurrency markets are a very different beast than what they’re used to in traditional finance, with a less developed infrastructure and some pitfalls to avoid. Here are a few critical considerations when buying Bitcoin in bulk.
As the cryptocurrency markets have grown and due to a lack of regulation, a vast number of trading venues simply popped up out of nowhere, creating a crowded and competitive market. Even as the total market capitalization has risen, liquidity is highly fragmented over multiple exchanges and brokers.
According to a recent report published by eToroX, which provides a cryptocurrency onboarding solution for institutional investors only 21% of institutional investors view fragmented liquidity as a positive, which is entirely understandable. Bulk trades have the potential to disrupt markets unless there’s sufficient liquidity to support them.
For this reason, many institutions prefer to buy Bitcoin in bulk using an over-the-counter (OTC) service that can handle the kind of volumes demanded by institutions. OTC brokers also offer other advantages, such as a fixed price without the risk of slippage and often with easy routes to onboard from fiat.
There are a few tradeoffs. For instance, while it’s almost guaranteed that a crypto OTC broker will support trading in Bitcoin, there will be fewer options to trade altcoins. Furthermore, because the trade depends on matching human counterparties, OTC clients can’t take advantage of the 24/7 nature of the cryptocurrency markets.
Many big cryptocurrency exchanges operate OTC desks, but you can also find local OTC brokers in major financial hub cities, such as London, New York, or Singapore.
It’s an unfortunate fact that cryptocurrency is a magnet for hackers. Therefore, before concluding any trades, investors should figure out a suitable solution for the secure custody of their cryptocurrencies.
As the regulatory fog has cleared and now that there is evident demand from institutional investors, there are signs that traditional banks will enter the digital asset custody space. For instance, both Bank of New York Mellon and Deutsche Bank have recently confirmed plans to offer cryptocurrency custodial services.
However, it’s still early days. Until the big banks catch up, investors have a choice to make between crypto-native custody firms, of which there is a growing number. Taking this route involves choosing a provider who can offer assurance that their security protocols are robust enough to protect against hackers.
The other option, which isn’t for the faint-hearted, is to self-custody. The only safe choice for self-custody of large sums of cryptocurrency is to invest in some decent hardware. The market for institutional-grade cold wallets is relatively niche, with only a small handful of providers.
Suffice to say; there is plenty of opportunity for companies wanting to make their mark on cryptocurrency custody solutions.
Choosing the Right Platforms for Your Needs
Buying and holding Bitcoin is a relatively straightforward strategy. If this is the plan, you don’t need much more than a reliable broker and a secure custody solution. However, for institutional traders wanting to get into cryptocurrencies, there are a few more things to think about because different platforms will serve different needs.
For instance, derivatives products may vary between exchanges, with options, in particular, being a relatively new instrument only available for trading at a small number of venues. A high-frequency quant strategy will mean finding trading platforms with low latency. Unfortunately, many exchanges run on infrastructure that can buckle during periods of high volatility.
Therefore, researching upfront will help avoid hopping between different providers trying to find one that meets your needs. Prime brokerage is still relatively nascent in the cryptocurrency sector, although crypto-native firms do exist. A prime broker is often likely to provide a more full-featured solution that can better cater to institutional demands.
It’s important to remember that for as long as it has existed until now, cryptocurrency has been the preserve of individual investors and traders who have very different needs to institutions. The drive to institutional adoption is still very early on. As more investment flows into the space, the infrastructure will also mature to the point that it more closely resembles the traditional markets.