Institutional capital is the anchor crypto markets need
Cryptocurrency markets are notoriously volatile. That’s part of why we created EURS, a stablecoin pegged 1:1 to the price of the euro, which enables investors to easily move money on the blockchain without remaining exposed to the volatility of assets like bitcoin. But stablecoins are just part of STASIS’ overall mission. At the end of the day, our company exists to make digital assets accessible for institutional investors. We believe that this institutional participation will make cryptocurrency markets more prosperous for nearly everyone involved.
One of the major effects of institutional participation will likely be reduced volatility for digital assets. Cryptocurrencies in general, and bitcoin in particular, are notoriously volatile, regularly swinging several percentage points or more in a single day. While some investors run strategies that benefit from this level of volatility, many people want a degree of predictability when it comes to managing their portfolio.
Investing based on valuation, not sentiment
Recent swings in bitcoin’s price are partly due to larger economic trends, such as re-emerging concern about a US-China trade war. But for the most part, the extreme volatility is driven by the fact that the vast majority of cryptocurrency trades are done by retail investors, and aren’t based on any sort of underlying valuations.
When institutional investors consider buying (or selling, or shorting) an asset, they develop sophisticated models to determine how much they think the asset is really worth. If the price is lower than this determined value, they’re more likely to buy. On the flip side, if the price is higher, they’re more likely to sell the asset, or perhaps short it. These valuations act as a sort of anchor on the price of an asset. If it swings too far below investors’ valuations, their increased willingness to buy will create upward price pressure, and vice versa.
Retail investors, on the other hand, tend to trade primarily on sentiment. They don’t actually know how much an asset is worth, and they probably don’t care. They’re just interested in whether the price is going up or down. If it’s going up, they’ll want to own the asset; if it’s going down, they’ll want to sell it. When retail investors are the primary force in a market, this reactionary dynamic can exacerbate price movements in both directions.
Reducing correlation among digital assets
Institutional capital also reduces correlation among assets by buying some and not others. Right now, most retail investors are probably more interested in the “crypto market” overall than they are in the fundamental differences between various digital assets. But even among the largest cryptocurrencies, there are key differences in both protocol design and goals, meaning that in the long term these assets shouldn’t be expected to all follow the same price trajectory.
Because of their focus on valuation, rather than just momentum, institutional investors are more likely to incorporate these differences into their investment decisions. They’re more likely to buy certain assets that they think will perform over time, instead of just getting broad exposure to “crypto” in general. This will reduce the price correlation between cryptocurrencies, helping the strongest assets continue to increase in value, while weaker assets plateau or decline in value.
Investing for the long term
Institutional investors also tend to invest with longer durations than retail investors. Retail investors often invest with a specific goal in mind — retirement, buying a house, etc — while institutional investors are simply trying to generate the maximum return on capital, even if this takes a very long time.
Because they hold assets over the long term, these investors aren’t swayed by headlines or short-term market moves. This reduces the hold that momentum has on market prices, and helps steady prices relatively closer to the consensus valuation.
Bringing institutional investors into the crypto market
Institutional investors can only anchor the cryptocurrency market if they’re present in it. So what will it take to bring these investors to the market?
There are several types of risk that retail investors don’t always worry much about, but that institutionals take very seriously. One of these is counterparty risk: institutional investors want to know who it is they’re trading with, and be confident that this counterparty will hold up their end of the deal. Another issue is custody risk: while retail investors may love holding bitcoin in wallet applications on their iPhones, institutional want a higher degree of confidence that their private keys won’t be lost and their wallets won’t be hacked.
At STASIS, we’re building an ecosystem around our stablecoin, EURS, to address these and other risks. We’ve partnered with leading digital asset custodians to make sure that institutional investors who own our token always have a safe place to store it. We’ve also built a network of licensed financial intermediaries supporting EURS, so that investors can interact with counterparties that have been properly vetted and approved by local regulators. By committing to initiatives like these, we hope to make cryptocurrency markets more appealing for institutional capital, and therefore less volatile for everyone.
