Institutional Investors Are Using Back Door for Crypto Buys

[Hydrogen]

Institutional investors are becoming more involved in the $220 billion cryptocurrency market than many observers may realize.

Buyers such as hedge funds have replaced high-net-worth individuals as the biggest buyers of large swaths of digital coins worth more than $100,000 through private transactions, according to Bobby Cho, global head of trading at Cumberland, the Chicago-based cryptocurrency trading unit of DRW Holdings LLC, which handles the over-the-counter purchases.

“Wait until institutional investors embrace crypto” has long been the rallying cry for digital-currency enthusiasts as prices surged and collapsed in the past year amid shifting expectations for regulatory acceptance of the asset class.

Meanwhile, the big sellers -- miners, whose computers generate coins by confirming transactions -- have begun scheduling regular coin sales instead of holding or waiting to offload them during market rallies. Many of the largest miners have also set up their own liquidity desks and operations.

“What that’s showing you is the professionalization that’s happening across the board in this space,” Cho said. “The Wild West days of crypto are really turning the corner.”

The over-the-counter market facilitated anywhere from $250 million to $30 billion in trades per day in April, according to researchers including Digital Assets Research and TABB Group. Exchanges have recently handled about $15 billion in daily trades, according to CoinMarketCap.com.

“We’ve seen triple-digit growth enrolling in our OTC business," said Jeremy Allaire, chief executive office of Boston-based Circle Internet Financial. “That’s a big growth area."

While the OTC market has declined along with crypto prices, it likely hasn’t dropped as much as volume on exchanges, which is down 80 percent since its peak, according to Digital Asset Research. Many institutional buyers have dived into crypto recently because the wide swings in prices have eased, Cho said.

"One of the biggest criticisms of crypto by institutional investors has been the volatility," Cho said. "Over the last four to six months, the market has been trading in a very tight range, and that’s seems to be corresponding with traditional financial institutions becoming more comfortable diving into the space." A third of DRW’s transactions are happening during Asia hours, he said.

Large buyers and sellers like private sales because transactions on exchanges can move coin prices. In a private sale, parties can fix the price in advance, instead of worrying about a sudden plunge or spike just as the transaction takes place.

"If they are liquidating [coins], they are liquidating them via OTC," said Tom Flake, founder of Bcause, a provider of mining facilities whose customers are institutional miners with hundreds to thousands of machines. The largest miners also sell their coins to sellers directly or through brokers.

One of the biggest reasons to buy coins outside of exchanges, though, is that there are often not as many coins offered for sale as the institutional buyers would like to buy, according to Sam Doctor, managing director and head of data science research at Fundstrat Global Advisers.

“At this point in time, because more and more institutions are beginning to enter the market, there’s more of an imbalance,” Doctor said. That’s why brokerage firms are springing up to help institutional buyers find inventory, he said.

What’s more, miners can offer something unique: brand-new, “virgin” coins, which some investors covet. Such coins command a premium of up to 20 percent, according to Travis Kling, founder of the hedge fund Ikigai. It’s easier to prove they’ve not been involved in money-laundering operations, he said.

https://www.bloomberg.com/news/articles/2018-10-01/institutional-investors-are-using-back-door-for-crypto-purchases

....

Excellent read. Wound up bolding near to the entire thing.

This seems to answer some of the commonly asked questions I've seen people asking while introduces new info which could better help to explain crypto price trends and some of the recent developments we've seen.

This would also seem to introduce new questions such as what volume has shifted from crypto exchanges to private transactions and to what degree the paradigm shift is related to declines in crypto trading volume.

The 20% increase in prices for newly minted bitcoins also interesting to consider.

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[stompix]

Two things I'm not agreeing with:

The over-the-counter market facilitated anywhere from $250 million to $30 billion in trades per day in April, according to researchers including Digital Assets Research and TABB Group.

OTC trades worth 30 billions$ or 3 million coins a day?
I think they've added a few extra digits.

The ones that deal through OTC are not buying in the morning and selling in the afternoon, those are either long-time investors or whales getting out of the game. Besides OTC deals are no happening in a few seconds, not when huge amounts like those are exchanged.

One of the biggest reasons to buy coins outside of exchanges, though, is that there are often not as many coins offered for sale as the institutional buyers would like to buy, according to Sam Doctor, managing director and head of data science research at Fundstrat Global Advisers.

“At this point in time, because more and more institutions are beginning to enter the market, there’s more of an imbalance,” Doctor said.

If there would be indeed a shortage of coins we would slowly see that in the price...and there is not a single trace of it.

[dothebeats]

As stompix have pointed out, the figures seem to be quite exaggerated, though I believe that to some degree, OTC deals for crypto is really happening for years now--and it's a shame that the Gox trustee hadn't thought of that. I'm not surprised on how deep these institutional investors are in bitcoin; I'd be more surprised to know if they aren't, given that this is a new market and the one who gets in first has the highest leverage. There's just too much money going in on crypto for every bull run that they simply cannot miss those phenomena. Maybe they're just afraid to shake the markets when they publicly announce their involvement? That would really make some plans ruined if you'd ask me, that's why they prefer to do OTC trades which, IMO, is a sensible and ideal move.

[Theb]

Something caught my attention more in the article and it is saying that miners have scheduled cryptocurrency sales which I think is really more concerning. Because if miners are selling their mined cryptocurrencies now then that means they don't care about at what price they are selling what they mined. Which means that even though we are still in the bear market mining cryptocurrencies is still a sustainable form of investment. It could only mean that they are still running their operations while still earning income.

[gentlemand]

The 20% increase in prices for newly minted bitcoins also interesting to consider.

This seems bizarre to me. If they depend on 'clean' coins the second they move they'll have Silk Road, stolen Gox, and lords knows what else polluting them. A two tier market will rapidly become a market for nothing. Virgin coins won't be able to move outside their gilded channels and everything else will be thrashing around in the mud.

Either coins get a hall pass unless there's a direct link to the owner's evil or we may as well all go home now. Would they pay under market for Tim thingie's US marshal auction coins? The moment something like this is taken seriously is when things start to unravel.

I hope this is astute marketing from miners to the easily duped. If not then it's a bit worrying.

Something caught my attention more in the article and it is saying that miners have scheduled cryptocurrency sales which I think is really more concerning. Because if miners are selling their mined cryptocurrencies now then that means they don't care about at what price they are selling what they mined. Which means that even though we are still in the bear market mining cryptocurrencies is still a sustainable form of investment. It could only mean that they are still running their operations while still earning income.

They're going to have humongous bills to meet. Not many will have the luxury of waiting for a mythical price that may never come. It signals that mining is OK if they're offloading as is. They're still making a profit.

[stompix]

Something caught my attention more in the article and it is saying that miners have scheduled cryptocurrency sales which I think is really more concerning. Because if miners are selling their mined cryptocurrencies now then that means they don't care about at what price they are selling what they mined. Which means that even though we are still in the bear market mining cryptocurrencies is still a sustainable form of investment. It could only mean that they are still running their operations while still earning income.

If they new coins sale indeed at a 20% premium it would be stupid for them not to do so.
They could easily sell the fresh coins and buyback with at least 10% net profit.

But reading again the article, I've spotted another strange thing

Meanwhile, the big sellers -- miners,

Miners can't sell more than 1800 coins, at 10k$ it would be 18 millions$ a day, in a 30 billion market ...how can you call them the BIG sellers?

[kryptqnick]

I agree that it is a good article. I never thought about what miners do with their coins, actually! I mean, traders are selling and buying coins, miners are generating coins.. It never crossed my mind that there can a big unaccounted market with miners selling newly generated coins to institutions! It's also funny that the current market situation which is mainly considered to be a sad one by crypto users is actually positive for more conservative investors, because the volatility is not as high as it used to be. Stable fluctuations somehow make the market more trustworthy, even though it lost a huge part of its capitalization.

[damberg]

As stompix and gentlemand pointed out, numbers might be a bit overestimated and consequences of such a market behaviour could be bad. The OTC Bitcoin market is probably not that big but it certainly explains where the volume disappeared. Unfortunately, OTC prices tend to influence market prices quite slowly and insignificantly.

[davis196]

Something caught my attention more in the article and it is saying that miners have scheduled cryptocurrency sales which I think is really more concerning. Because if miners are selling their mined cryptocurrencies now then that means they don't care about at what price they are selling what they mined. Which means that even though we are still in the bear market mining cryptocurrencies is still a sustainable form of investment. It could only mean that they are still running their operations while still earning income.

Well,miners have to pay their operational costs,like electricity,salaries,loans,rentals,taxes.It's common sense that they have to convert a part of their coins into fiat money.Obviously they can't wait until forever for the prices to reach last years ATH.I doubt that the miners might cause a price crash,they might cause a continuation of the bearish market and nothing more.
I'm not familiar with the OTC markets.I will have to do my research.

[StephanHofmann]

As the market is highly volatile, it is difficult to even predict what will happen by the end of this year. Hopefully the market will recover and thrive again by then. But, aything can happen.

[cryptocrusher]

Something caught my attention more in the article and it is saying that miners have scheduled cryptocurrency sales which I think is really more concerning. Because if miners are selling their mined cryptocurrencies now then that means they don't care about at what price they are selling what they mined. Which means that even though we are still in the bear market mining cryptocurrencies is still a sustainable form of investment. It could only mean that they are still running their operations while still earning income.

Well,miners have to pay their operational costs,like electricity,salaries,loans,rentals,taxes.It's common sense that they have to convert a part of their coins into fiat money.Obviously they can't wait until forever for the prices to reach last years ATH.I doubt that the miners might cause a price crash,they might cause a continuation of the bearish market and nothing more.
I'm not familiar with the OTC markets.I will have to do my research.

The market managed to increase multiple times before with high mining costs which were close to the real market costs, it's been done before and it will happen again. Miner's always act as a negative subduer on the market but the effects of their sales are not decisive enough to control the whole market.

[Aidenpeters]

In order to get the desired volume of cryptocurrency they go for back doors in order to get advantage over the market since the main market can't sell the amount of coins that are needed to fulfill the demand.

[carter34]

In order to get the desired volume of cryptocurrency they go for back doors in order to get advantage over the market since the main market can't sell the amount of coins that are needed to fulfill the demand.

I'm also thinking it can be one reason they indulge in such back door buying, more like disguising and probably buying lower quantity and from various exchanges. This is actually possible.

[The Sceptical Chymist]

Large buyers and sellers like private sales because transactions on exchanges can move coin prices. In a private sale, parties can fix the price in advance, instead of worrying about a sudden plunge or spike just as the transaction takes place.

Great article.  And the part I quoted here is what I assume the reason behind why these investors want instruments like futures and bitcoin ETFs.  It totally makes sense for deep pockets to not want to buy bitcoin on a traditional exchange, since for them the market is relatively small and they can drive it up or down with big buying & selling.  

In addition, I can't imagine anyone with serious money wanting to use any exchange other than a place like Coinbase, which is probably the least likely to scam you.  There's no way in hell anyone is going to use even an exchange like Binance to buy millions of dollars' worth of crypto.  

So what I'm wondering is what will happen if crypto actually crashes and these institutional investors lose a lot of money very quickly.  That could have some serious repercussions for other markets.  Hedge funds tend to use a lot of leverage when they trade, and that's gotten them in trouble in the past (like Long-Term Capital Management back in the 90s).  It's kind of scary to think about.

If they really are using back door its because of the shortage of bitcoins because of the competition.

I don't think there's a shortage of bitcoins, though it's hard to imagine there would be enough for everyone if investors with extremely big wallets want to get in.  Again, this is where bitcoin futures would come in handy.  They wouldn't actually have to own any bitcoin; they could just place bets on bitcoin's price.

[Bergqvist]

This seems odd to me. A two tier market will rapidly become a market for nothing. I hope this is astute marketing from miners to the easily duped.

[Brunus]

I am rather skeptical.
It seems to me that kind of usual news can not be confirmed and is deliberately left to circulate just to manipulate the market a little.
Obviously, everything is possible.

[iwah]

I read about the news few days ago and I begin to think that crypto market could worth more than the price stated on the coinmarketcap because most of these institutional investors investing through back doors might be accounted for and this more reason why we need the bitcoin ETF to approved so that these institutional investment will be more open and it will attract more to join.

[timerland]

The OTC market have long been there for large scale investors, but I guess this is only something that has been covered recently.

Obviously, large investors that don't necessarily have to belong to any particular institution would want to make private moves without affecting the rest of the market and/or to hedge against the volatility of bitcoin.

What I found most intriguing was probably the fact that premiums are being paid for untainted coins. I don't know if this is being exaggerated or actually happening. If it was actually happening, that poses a real issue as to the fungibility of bitcoin, especially with it happening with such a wide spread of 20%.

[Semosuchi Tesongrato]

There is always someone who knows one more than the others and makes statements that could also be true but can not be verified.
Institutional players may invest secretly in the cryptomarket.
So what?

[Altcoins enthusiast]

If institutionals investors are investing into cryptocurrencies through back door then bitcoin should have increased in price.  Bitcoin has been in bearish position and we expect investments to always translate into bullish trend.  Institutionals investors will one day Came into the market openly.