From institutional dominance to retail dominance in crypto assets to open a new era of financial markets

The financial markets we see today are driven by institutional investors. Any large financial company, from insurance underwriters to long-short hedge funds, is an institution. Generally speaking, the behavior patterns of various institutions are very similar. They are large in scale, so they have strict transaction management and risk control mechanisms; in addition, unless they are fully initiated by internal funds, institutions need to be accountable to partners and meet certain custodial investment indicators (most indicators are similar).

In short, for at least the past 50 years, financial markets have exhibited regular cycles, because institutions that control the direction of the market have similar behavioral tendencies. But this is not to say that they are all investing and trading exactly the same, but that the way they try to enter the market from a high position is similar. I think we are on the cusp of a new era-in this era, institutions are no longer the only “monopoly organizations” that determine the direction of the market. If it is as I said, the market structure will have a major change.

Crypto assets: adding liquidity to the portfolio

Before we delve into investment behavior in the crypto market, let’s explain why crypto assets are a game changer. Suppose you want to finance a business or idea in a traditional industry or Web 2.0, you can only get money from investment funds or investors you recognize. Some jurisdictions do not have rules for authorizing investors, so in theory, anyone can invest in startups. But there is a problem: most start-up companies will not accept angel investment less than US$5,000, and most retail investors cannot invest at least US$5,000 in multiple start-up companies. Company investment).

For the few retail investors who can do this, the investment is completely illiquid before the startup is acquired or listed. Even if you know that the company you are investing in is doing well now, it will eventually fail, and you can’t do anything about it-because your entire portfolio is illiquid. Similarly, if you know a small startup that may become a unicorn, you have no way to invest in it. The data as of 2019 shows that it takes an average of 6 years for a company to go from the first round of financing to going public. In these 6 years, you can’t do anything.

From institutional dominance to retail dominance in crypto assets to open a new era of financial markets

Time from the first round of financing to exit (listing) (2000-2018) Source: Ian Hathaway

The crypto market has solved this problem more or less. Crypto investors don’t have to wait 6 years to get liquidity soon. The current general process is that start-up projects obtain seed rounds of financing from funds or well-known angel investors, and then they use the money to create a minimum viable product (MVP, Minimum Viable Product, which is the fastest and most concise To build a usable product prototype, use this simplest prototype to test whether the product meets market expectations, and through continuous rapid iteration to modify the product, and finally adapt to market demand), launch a native governance token (its liquidity is important to all People open up), and finally gradually realize decentralization. In this case, even if you don’t have a fund and you are not an angel investor, you still have the opportunity to buy as soon as possible, because retail investors can buy the governance token of a $500 crypto startup project.

What’s interesting is that some crypto projects even skip the seed round altogether and carry out the so-called “fair start.” Governance tokens are distributed directly to users over time, and there is no private sale round. This model promotes the rapid realization of decentralization and can obtain instant liquidity, but it is not suitable for all projects, because some projects require funds to establish MVP (Minimize Viable Products).

Imagine if Twitter had built the first iterative version that could be widely used, and would “go public” in a few weeks at a valuation of around eight figures. This is the kind of opportunity that only the crypto market can provide. Of course, the field of encryption is an emerging industry, which means that it is risky and not suitable for people who are psychologically vulnerable. But for retail investors who want to obtain asymmetrical upside opportunities (asymmetrical investment opportunities refer to transactions where losses and gains do not correspond exactly), and are willing to bear predictable risks, crypto assets are a good option choose.

What needs to be reminded is that considering the current status of the industry and the black box of securities law, this decentralized ownership model and extensive liquidity acquisition channels are only beneficial to native digital encryption projects. This explains why DeFi The agreement is so popular in this model. I think that over time, the ability to tokenize ownership will become an opportunity that any business can take advantage of, but it still has a long way to go.

In short, encrypted assets can broaden the early traditional investment channels on a large scale, but they also need to be viewed dialectically.

The impact of crypto assets and’memetic stocks’ on the market

To a certain extent, the market is jointly promoted by retail investors, but in general, institutional investors are still a greater force. However, in recent years, the proportion of U.S. household net assets used for stock investment has increased substantially; Barclays also emphasized in a report in September 2020 that retail investors have suddenly risen and become a major player in the options market. Driving force.

From institutional dominance to retail dominance in crypto assets to open a new era of financial markets

Households and non-profit organizations, directly or indirectly holding company shares as a percentage of total assets Source: FRED

The market is essentially driven by behavior, and the “fundamental” is caused by liquidity (liquidity refers to the buying and selling of assets). A stock will not automatically rise from US$20 to US$35. Its price will change because the valuation model predicts that the stock’s return will be higher in the next three quarters. Investors believe this model and believe that it is now The value of the stock is underestimated, so it was bought.

This does not mean that fundamentals are not important. Fundamentals are the logic behind the transaction and are the growth catalyst, prompting investors to buy. However, if retail investors continue to transfer funds to the liquid market, and follow the rigid way of thinking followed by most well-known institutional investors, their basic control over the market will soon be weakened.

This year, cryptocurrencies and some memetic stocks rose at the same time, greatly accelerating this trend. (Note: Meme Stocks refers to’memetic stocks’. They are usually overpriced and experience rapid growth spikes in a short period of time.) People see their acquaintances making a lot of money on crypto assets or Gamestop , So I decided to try it too. In this case, the market does not seem to see the upper limit, and even crypto investors who lie down are considered to be the next Buffett. This has stimulated people’s interest in investment, and the concept of “investment is entertainment” prevails.

From institutional dominance to retail dominance in crypto assets to open a new era of financial markets

Source: Coindesk

Several experts believe that blockades around the world, coupled with a low interest rate environment, are another catalyst for retail investors to increasingly participate in secondary market transactions.

The behavior of retail investors intensified market volatility

As retail purchases begin to occupy a larger share of many markets, it is necessary to consider their behavior patterns when analyzing these markets. For example, if the buyer’s valuation model indicates that a stock that trades at $25 is worth $45, hedge funds will start buying; but if retail investors who account for the majority of the stock do not believe this valuation model , They will not buy. This difference in behavior will have an impact on stock prices. Institutions have become a minority group. Therefore, the impact of institution forecasts on market prices is much smaller than before.

If you think about it, this is also the best explanation for the dramatic volatility of crypto asset prices. Retail investors are generally not as confident as institutional investors, and their emotions are often more erratic, which also leads to market price fluctuations. When an encrypted asset falls, the probability of a fall will be greater, because people buying and selling it are more susceptible to short-term price fluctuations. The same is true when prices rise. Therefore, the crypto market often rises excessively during the rise, and falls to the bottom during the fall. You may see more and more of this in the stock market, although the magnitude will not be too great.

Although I did not look for data to support it, I have reason to believe that if you compare the historical data of large-cap stocks such as Amazon and Google with retail-led stocks such as AMC (AMC Entertainment Company stock) and Tilray (American industrial major ma stock), You will find that the volatility of the latter will far exceed the former. Institution-led asset classes will not be negatively affected by the increase in retail penetration. But I think we will see new market dynamics begin to sweep into certain asset areas, mainly because the stories in these areas attract investors from the new era (such as Generation Z, etc.).

It is worth noting that all these inferences are based on the fact that the share of retail investors in a particular market continues to grow at the same rate. If the share of retail investors does not continue to grow, the market may return to 2020; but if it continues to grow, please prepare for a new era of market behavior.

Many people said that if the equity of a startup company can be freely traded, it will certainly show volatility similar to that of the crypto market. Although it is true, I think it will be more accurate to describe the market situation where the main investors are retail investors. Soon, everything will become investable assets, from your friend’s new company to your favorite artist, I bet retail investors will also become major investors.

The main conclusions drawn in this article

1. With the gradual opening of the investment stage (early stage) that was previously closed to retail investors, and with liquidity, the market will have more opportunities and risks.

2. As retail investors gradually dominate certain specific markets, the structure (trend) of these markets will undergo tremendous changes.


Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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