They help, but they won’t act as most would like. Many think that institutional players will (1) pump their bags and (2) end the wild crypto crashes we’ve seen.
The latter is demonstrably false, and the former might not work as you expect. Let’s start with the “end of crypto winter” thesis.
1. The End of Crypto Winters?
Below is an image of the QQQ (Nasdaq 100) during the Dot-Com era. During that period, it crashed more than 82%.
The cryptocurrency market is not more mature now than the tech market was circa 2000. Obviously, institutional capital was involved with the Nasdaq 100. If they could bet burned, then so could the crypto market.
2. Pump My Bags?
Next is the “pump my bags” thesis. In a way, this one is accurate. But remember that institutional capital doesn’t flow directly from $BTC into your favorite alt-coins. It tends to get trapped at the upper tier of the digital asset space.
To prove my point, below is an image of $ETH in terms of $BTC. If the chart is moving down, that means that $BTC is beating $ETH.
Recall that until Trump won, $ETH was lagging because its primary use was in decentralized finance, which was all but illegal under Biden’s SEC chair, Gary Gensler.
After Trump’s win, $ETH does appear more usable, but $BTC has also been boosted on anticipation of a Bitcoin Strategic Reserve in the US.
Concluding Thoughts
On the whole, institutional capital entering the digital asset space is a good thing — and it’s the only thing that could grow the space financially.
But this will not prevent digital assets from experiencing large declines and will not affect all assets equally. The majors will tend to benefit most directly from institutional funds, while other coins will benefit from narrative proximity.
-Sebastian Purcell, PhD
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