Did US Institutions Win Over Asian Retailers?

Bitcoin experienced the second-strongest January in its history – and the best since 2013 – rising nearly 40% amid broad reports that institutional investors were back on board.

Zhong Yang Chan, head of research at CoinGecko, told Cointelegraph that there was “net institutional inflow into digital asset funds in January 2023, especially in the last two weeks, with Bitcoin the biggest beneficiary.”

Meanwhile, a CoinShares blog noted on Jan. 30 that total assets under management in digital asset investment products — a good measure of institutional participation — had risen to $28 billion, led by Bitcoin (BTC), which was up 43% from November 2022’s low level. point in the current cycle.

The reasons for this bullishness varied depending on who you asked, ranging from macro factors such as a pause in inflationary growth to more technical reasons such as a squeeze on BTC short sellers. Elsewhere, a research report from Matrixport noted that institutional investors are “not giving up on crypto,” further suggesting that as much as 85% of Bitcoin purchases in January were the result of US institutional players. The cryptocurrency services provider added that many investors had used the January 12 US CPI “as a confirmation signal to buy Bitcoin and other crypto assets.”

Almost all of the gains were during US market hours

But how did Matrixport come to attribute up to 85% of monthly BTC growth to US institutional investors? As the Singapore-based firm explained in its recent market overview: “The most astonishing statistic is that almost all of the +40% year-to-date rally in Bitcoin has occurred during US market hours. […] That’s 85% of the Bitcoin movement.” Matrixport continued:

“We’ve always worked on the assumption that Asia is driven by private investors, and the US is driven by institutional investors.”

So if Bitcoin’s market price rises during US market hours but falls during Asian hours, as it appeared to happen in January, one can assume that US institutional investors bought Bitcoin as Asian Retail Traders Sold It – Some Kind of Yin-and-Yang Action? Apparently so. During U.S. trading hours, “institutions, also known as ‘stable hands,'” took advantage of the falls, Matrixport added.

Recent: Status: Decentralized domain services reflect industry progress

Is this really what drove BTC’s price up in January? “In my personal opinion, the assumption that Asian retail and US institutional investors are two main drivers of net Bitcoin flows is valid,” Keone Hon, co-founder and CEO of Monad Labs – which developed the Monad blockchain – told Cointelegraph. There are other market players, of course; but when looking at flows, “irregulars” have the biggest impact, Hon continued:

“In the current market, institutional players represent a potentially new – or renewed – source of demand corresponding to early 2021. Meanwhile, on the retail side, Asia-centric exchanges such as Binance, Bybit, Okex and Huobi represent the majority of spot volume and almost all of derivatives volume. “

Others, however, are not so sure. “There is no way to confirm that US markets are driven by institutional investors and Asian markets are driven by retail players since we do not have data related to the identity of traders,” Jacob Joseph, research analyst at CryptoCompare, told Cointelegraph.

True, there is a “sentiment” or belief that large retail interest exists in Asia, “especially in Korea, as KRW represents the fourth largest trading pair after USDT, BUSD and USD,” Joseph continued, but that cannot really be quantified.

Still, he acknowledged that the Matrixport report was interesting, adding: “Our data shows that more than two-thirds of BTC returns in January can be attributed to US market hours, and our historical hourly data also shows that above-average volume is traded during these the hours.”

Justin d’Anethan, director of institutional sales at Amber Group – a Singapore-based digital asset firm – told Cointelegraph, “I don’t really have any metrics to say whether 85% is on point or not.” He was inclined to see the rally in January as broad and macro-driven, especially with lower inflation and expectations that the US Federal Reserve will not continue to raise interest rates. He added:

“You can see stocks, gold, real estate and, yes, crypto. It’s likely to be driven by both large institutions and smaller investors, especially when FOMO kicks in.”

D’Anethan also looked at Coinbase’s latest premium index, “which is in the green, but not massively. That’s usually a good metric to see if major U.S. entities are on a shopping spree. Right now, it looks subdued, positive, but probably just redistribution of money that was on the sidelines.”

Jacob said a better way to measure US institutional activity is to look at exchanges “that only cater to them.” Thus, “CME Group, the largest institutional exchange in crypto, saw its monthly volume rise 59% in January,” while LMAX Digital, another institutionally focused exchange, “also saw its trading volumes rise 84.1%, higher than the average increase. in trading volume on other exchanges.”

So also, who’s to say that Asian retailers don’t operate during US market hours? Chan, for example, acknowledged that while markets “tend to move more during US hours,” CoinGecko believes this is “more a reflection of the outsized influence that US monetary policy currently has on the crypto market and broader financial markets . Traders are most active when they believe the markets are volatile, and in the current environment, Asian traders may also have gravitated towards ‘Fed watching’ to catch potential market moves.”

Chris Kuiper, director of research at Fidelity Digital Assets, told Cointelegraph that there is no single event or catalyst that can be pointed to to explain Bitcoin’s recent price movement. But to him, “It’s not surprising given the conditions that have formed — namely, the growing amount of illiquid coins, coins that haven’t moved in over a year — and the continued outflow of coins from exchanges.” Both factors lower the supply of BTC “and create conditions ripe for higher moves.”

Kuiper also cited the futures and derivatives market as a factor in BTC’s rise, “with a large amount of shorts being liquidated over the past few weeks.” D’Anethan also mentioned “short sellers being squeezed” as a possible driver. “In itself, it is not a reason [prices] goes up, but when things rise, it accelerates.”

Looking forward

Anyway, if one agrees that January held some promise for Bitcoin on the institutional front, can one necessarily assume that it will persist through 2023?

“As the market gains clarity on which players avoided contagion, we will see an increase in new players that were sidelined during the last half of last year, especially as innovative custody agreements emerge to address the major pain points of the recent collapses ,” David Wells, CEO of digital asset trading platform Enclave Markets, told Cointelegraph.

Recent: What crypto hodlers should keep in mind as tax season approaches

More needs to be done to sustain the institutional momentum, the executive stated. “To really attract institutional liquidity, crypto markets need to build more sophisticated products that allow for proper hedging and risk management,” Wells added. However, he is optimistic that suppliers will take up the challenge.

It appears that inflation may have peaked, and many expect the Fed and perhaps other central banks to slow the pace at which they tighten interest rates, Kuiper said. While that doesn’t necessarily portend rising risk asset prices, “in the longer term, institutions and other asset allocators may again turn to Bitcoin if central banks ease aggressively as they have done in the past,” he concluded.