How Is Institutional Crypto Investing Different from Retail/Individual Investing?
Institutional investing is vastly different from retail investing in many important ways, but Unido was built to fulfill the demands of both investor classes. Read on below to learn how.
For any product or service, pioneers and early adopters are typically private individuals — enterprising people who are willing to take on the risks to explore the potential of new ideas. Large corporations and institutions, on the other hand, tend to be laggards; only once a new idea has shown significant potential and the possibility of mass adoption will these large heavyweights enter the market.
The same is true for cryptocurrencies. For the better part of the last decade, although cryptocurrencies have gained widespread attention from retail investors, crypto tokens, products, and services have fought an uphill battle to get large institutions to invest in and adopt blockchain-based technologies.
That is all changing very rapidly. We now see many large institutions showing real interest in everything crypto, and this raises an important question: How is institutional crypto investing different from retail investing by individuals?
To answer, let’s first define institutional and retail investors.
Institutional investors are the big, established, recognized, well-funded, and resource-rich players in the financial space. They are the pension and mutual funds, hedge funds, insurance companies, investment banks, and large private equity investors that manage billions of dollars worth of assets for their clients. In the crypto markets, a separate class of Crypto Funds, Funds of Funds, and Hedge Funds have appeared since its boon in 2017.
The money that these investors use is usually not their own, although they can reinvest their profits into different opportunities if they wish. In most cases, their investments are large honeypots of funds accumulated from thousands of individuals that the fund or institution invests in different opportunities or vehicles such as cryptocurrencies. This money is professionally managed by experts trained to make the most of the available investment opportunities on behalf of their clients, for which they receive commissions, a percentage of any profits, or both. These experts adopt very complex and advanced investment strategies to make profits for themselves and their clients.
Due to their size and the amount of money they have to invest, institutional players can usually negotiate better fees when they make larger investments, and they can also access investments that the average investor cannot, such as investments that have high minimum funding/investment floors. In Crypto markets, institutional investors are able to invest in tokens in their VC, seed funding, and IDO rounds.
Retail investors include everyone not included in the institutional category. Anyone who buys or sells crypto or other investments either on their own or through a broker, agent, or institutional services provider is a retail investor. Retail investors are typically not financial sector professionals and they adopt a wide range of strategies to make money, often learning via informal channels such as finance blogs, YouTube videos, and social forums.
How Institutional Investors Differ from Retail Investors
Now that we know more about the players we are talking about, here are additional details on how they are different from each other.
Institutional investors tend to invest large sums of money in individual investments. They will not purchase a small amount of crypto or put a nominal amount of money into an investment. They will do their due diligence then invest sometimes tens or even hundreds of millions of dollars into investments that they believe have the potential to deliver positive returns. These investments are so large that they can have a real impact on prices and liquidity.
Retail investors, on the other hand, may invest only a few thousand dollars — even less in many cases — in investments that they believe will generate a return. This can take the form of, for example, a single crypto token, or even a fraction of a token. These investments are so small that on an individual level, they have no real impact on the market.
Strategy and Analytics
Institutional investors adopt highly advanced strategies powered by analytics to make investment decisions. For example, popular institutional trading strategies include automated arbitrage, fund rebalancing, mean reversion, scalping, using the Ichimoku cloud strategy, and the triangular arbitrage strategy. Many of these are strategies that the average person has never heard of and require a significant amount of computing power and an advanced understanding of financials to use.
Retail investors will typically use much simpler trading strategies, such as dollar-cost averaging, day trading, or long-term holding. They may try to time the market to buy low and sell high or simply put money into an investment and forget about it until they need to exit the market.
Because institutional players do not own the funds that they invest on behalf of their clients, they tend to be more risk-averse than retail investors. However, there are many classes and categories of institutional investment products, some with higher risk levels than others. These investments are designed to cater to investors with different risk appetites, whether high or low.
Retail investors also fall on a spectrum when it comes to risk. Some investors, such as younger traders with few responsibilities and personal costs, often choose high-risk/high-reward investments in the hopes of making significant profits off an investment even though the risk is high. Others, such as retirees and those with families and many responsibilities, tend to prefer lower-risk investments.
Ownership, Compliance, and Governance of Assets
There are governance and compliance rules that apply to both institutional as well as retail investors, but it is usually harder for institutional players due to strict corporate laws they have to adhere to during all their operations. As such, retail investors may be able to get away with more when it comes to investing in a non-compliant manner for investments of many types, although there are always oversight bodies that work to ensure that everyone is compliant with all the relevant laws.
As for ownership, retail investors usually own the investment they put money into. If a retail investor purchases a crypto token or asset, he or she owns that investment. For institutional investors, they may or may not own the investment they put money into. If a hedge fund puts money into a crypto project or purchases utility tokens on behalf of its clients, the clients are the ultimate owners of the assets purchased, even though the fund manages and makes decisions regarding the investment. However, private equity firms that invest in, for example, startups or other investment opportunities will own whatever it is they put money into, whether that is digital tokens or ownership of a project.
Security and Custody of Assets
Retail investors who use institutional services can hand over the responsibility of securing and holding custody of assets to the institutional services provider. So, if someone purchases digital tokens on Coinbase, Coinbase will secure and hold custody of those assets for the client.
Institutional players must secure and hold custody of the assets they purchase, although a growing trend is for a new category of services providers — custodial services providers — to provide custody services to institutional players so that they do not have to secure or hold their assets either, similar to retail investors.
Unido — Providing Access to Decentralized Capital Markets
Despite the many differences between retail and institutional investors, they both have shown immense interest in investing in new, blockchain-based technologies and cryptocurrencies. Decentralized financial applications — referred to as DeFi — have grown rapidly in popularity thanks to their ability to provide both retail as well as institutional investors with investment opportunities that never existed before.
Because there are significant challenges in on-ramping new users into the DeFi fold, Unido was designed to help both institutional, as well as retail investors, connect to the growing DeFi space thanks to an advanced, market-ready suite of tools and applications. Below are details on some of the applications available on the Unido platform.
Unido Enterprise Platform
Unido Enterprise Platform (EP) helps enterprises such as crypto-native firms and asset management firms seamlessly and securely manage their assets. It creates a bridge for businesses to interact with DeFi networks while maintaining compliance with relevant laws.
Unido Institutional is a full-stack cryptocurrency bank-in-a-box that can be used by banks, brokers, and institutional players. It allows these institutions to offer their clients crypto banking facilities similar to those provided by traditional banks. It brings the power of the Unido platform to traders and businesses that want exposure to DeFi and cryptocurrency investments.
Unido Core is a proprietary key management and transaction signing technology. It provides flexible governance that brings advanced security, plug-and-play API connectivity, and seamless interoperability to legacy systems using a blockchain-agnostic architecture that works with any on-chain use case. New businesses and traditional financial players can connect their existing systems to Unido Core without having to revamp their IT infrastructure or make other costly adjustments to their business processes.
With the services above, Unido provides comprehensive cryptocurrency trading and investment services to both retail as well as institutional players so that they can participate in a wide range of crypto trading and investment opportunities. Learn more about available services and how Unido can help you by visiting https://www.unido.us/.