High Volatility and Liquidity: Reasons why Crypto is Growing Popular Among Institutional Investors

Ritika Sharma
Ritika Kumari Sharma is an Economics Honors graduate from the University of Calcutta. She is completely into finance and believes that cryptocurrencies are the future. She is an enthusiast learner about the cryptocurrency and blockchain technology.
  • BTC reached the annual average of $12000 and reached an intraweek high of $12399 on 17th of August.
  • Chicago Mercantile Exchange which is mainly known for its derivative options on BTC and ETH, has also reported the influx in open interests implying institutional participation

2020 has been the year of Bitcoin in many aspects. The investors saw the much anticipated BTC rally last month. BTC reached the annual average of $12,000 and reached an intraweek high of $12,399 on the 17th of August. We saw one of the largest investment management companies, Grayscale Bitcoin Trust purchasing major portions of newly minted Bitcoin. 

Institutional Investors Influx in Options and Derivatives Market

But most importantly we saw the institutional interest in cryptocurrency investments gradually rise throughout the year. The reason why Grayscale Bitcoin Trust bought enormous shares of BTC was because of the rapid increase of institutional interest. 

Not just Grayscale, the Chicago Mercantile Exchange which is mainly known for its derivative options on BTC and ETH, has also reported the influx in open interests implying institutional participation. In June, CME had experienced consecutive 12 days of record open interest. The total number of contracts bought alone that month was 9858 which is equivalent to 49,290 Bitcoin. 

Trading Assets Lack Liquidity and Foreign Exchange Markets Lack Volatility

The Vice President of Huobi, Ciara Sun said that their platform has seen interest from both retail and institutional investors, who are leveraging their Futures market place. So what drives this immense interest from institutional investors? As per representatives from Huobi it is the price volatility and high liquidity that is associated with digital assets. Traditional assets may have high volatility but they lose to digital assets in terms of liquidity. Again Foreign Exchange markets may have high liquidity but then they lack volatility. However, the digital assets market may be risky for people who do not know trading and secure their assets. 

Digital Assets can be Used Against Price Inflation

However, this isn’t everything. Digital assets can be used as an effective hedge for price inflation. This is because digital assets are decentralised by nature which means their authority is not dependent on any centralised institution or government. On the other hand, traditional assets are subject to the government. Consequently, when the government is trying to settle the economy by printing currency,  cryptocurrencies can be used by investors to save their funds from inflation. In general, retail or institutional investors seek investments which tend to have high volatility and liquidity.

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