What are the differences between crypto retail and institutional investing? Ideally, institutions and large corporations have a propensity to be a bit lackadaisical in their approach and tend to enter into a market only when they see a significant potential in an investment and a possibility of mass adoption.
It is the same in the case of regular investments as well as in crypto coins.
It is true that in the past decade cryptocurrencies have gained a widespread interest among the investors but the institutional investors seem to be slow to adopt it on a mass scale.
There are lots of products offered by the crypto market that have driven the retail investors thick and fast towards it.
These products include a vast range of crypto products and assets which still finds it to be an uphill task to draw the attention of the institutional investors as it is desired.
However, things are changing rapidly and now you will see several large institutions turning towards blockchain related technologies and showing real interest in crypto.
You can go with retail investing or institutional investing in crypto only if you know the differences between the two.
Since there are many such differences not known to an average investor, and you may be one of them, this is an article that will help them to be knowledgeable and confident while investing.
No matter which investor class you belong to or choose to use, these important differences will help you to take on the risks as they come when you explore the vast and exciting crypto space.
Crypto Retail vs Institutional Investing – The Differences
Needless to say, all types of investors are different and it applies to the institutional as well as the non-institutional or retail investors.
It is worthwhile to understand the difference between them if you are planning to invest in crypto.
In fact, there is a high chance that you may not qualify as an institutional investor.
At this point, an important question may come across your mind: How is retail investing by individuals different from institutional crypto investing?
Well, to find that, you will need to go through this article in its entirety.
Size of Investment
The first point of difference among the institutional and retail investors is the size of investment made by each.
Ideally, the institutional investors invest a large sum of money instead of putting in a nominal amount in buying crypto coins.
They will first do their due diligence to find out the potential of positive returns and then invest tens or even hundreds of millions of dollars into crypto.
More often than not, the size of their investments is so large that it has a significant impact on the liquidity and prices of the crypto coins.
On the other hand, the retail investors restrict their investment size to only a couple of thousand dollars, if not less than that as it is found in most of the cases.
They too invest in only those specific products that have the potential to deliver significantly high returns.
However, the most unique aspect of the retail investors is that they can invest in a single crypto coin or even a fraction of it.
The size of their investments is so small on an individual level that it does not have any real impact on the prices of the coins in the crypto market.
Strategy and Analytics
In terms of investment strategies adopted, the institutional investors tend to follow the most advanced investment strategies.
Their strategies are supported by careful and precise analysis after considering several indicators, charts and patterns.
Some of the significant strategies followed by the institutional investors include mean reversion, automated arbitrage, scalping, fund rebalancing, triangular arbitrage, Ichimoku cloud strategy, and more, depending on the type of asset they want to invest in.
These strategies are seldom followed, if not even heard, by an average investor. All these strategies need a lot of computing power and a thorough knowledge of the financials required to use.
On the other hand, the retail investors typically follow investment strategies that are much simpler and need a smaller amount of computational power and resources.
The most commonly followed investment strategies followed by the retail investors are day trading, dollar-cost averaging, and long-term holding.
The main intention of these retail investors is to choose the right time to enter into the crypto market by buying low and selling high.
They may even put their money on a particular crypto coin and forget about it till they find that the time is right to exit the market.
The institutional investors typically do not own the money they invest in the assets on behalf of their clients. Therefore, they are more risk-averse as compared to the retail investors.
However, this does not mean that the risk appetite of all institutional investors is the same. There are different types of such investors and the risk level they are willing to take may vary according to their categories.
And, the market offers a different range of products that caters to the different risk appetites of different institutional investors, whether it is high or low.
However, in comparison, the retail investors seem to fall within a specific spectrum when it comes to the risk tolerance aspect.
Some of the retail investors may choose to invest in products that offer both high reward and high risk. This is the case seen mostly among the younger traders.
This is because they have little personal costs and fewer responsibilities and hope to make a significant amount of profit from their investments even if the risk level is high.
As for the other retail investors such as those with families and retirees tend to go with investments that come with lower levels of risk because they have several other responsibilities and commitments to keep.
Compliance and Governance
The institutional investors and retail investors also differ in other major aspects such as compliance and governance.
Though the rules apply to both these investors, they are quite harder and stricter in the case of the institutional investors as compared to the retail investors.
The corporate laws are also quite strict and they need to adhere to both while conducting all their operations.
However, on the other hand, the retail investors may get away with it when they make an investment in a non-compliant manner.
This can happen in several different types of investments, though there are different bodies to oversee that everyone complies with the laws relevant to each.
In terms of ownership, in the case of the institutional investors, a crypto token or asset they put their money into may or may not be owned by them. This depends on the type of the investment made.
For example, in the case of hedge funds, the money invested on behalf of the clients in crypto projects or purchase of utility tokens makes the clients the ultimate owners of the crypto purchased.
This is in spite of the fact that the investor makes the decisions regarding the investments and manages them.
However, in the case of a private equity firm investing in a digital token or a project will automatically own the asset they put their money into. This is the case with the startups as well as other investment opportunities.
The retail investors, on the other hand, typically own the asset they put their money into, though they may use institutional services to hand over their responsibility of holding custody and securing the crypto assets.
However, the growing trend now is to give the responsibility of holding custody of the assets purchased to a new group of services providers called the custodial services providers. These services are used by both the retail as well as the institutional investors.
Diversification and Focus
Diversification is a vital requirement for institutional investors but it is not as it should be.
However, the retail investors can focus more on it because they can readily choose their investments and therefore have a better chance to manage the risks involved by them.
Once again, since it is your own money, you will take personal interest in nurturing and monitoring your investments.
On the other hand, the institutional investors may not be able to give personalized attention to each investment because their investment portfolio is created by the money of other clients and they simply work on their behalf.
Some Other Differences
Here are a few other differences between the institutional and retail investors in crypto that are also good to know for a beginner especially.
As for the institutional investors, they are offered very low commission fees and brokerage since they deal with huge sums of money and play a big role in the market.
On the other hand, the retail investors are usually charged a high commission and fee for each trade.
The institutional investors have a better and easy access to every kind of information, irrespective of the type, on the market. In contrast, the retail investors can access retail-only and limited amounts of data.
The institutional investors usually have a large team consisting of highly knowledgeable and qualified financial experts working for them who are responsible to make the necessary decisions for them.
The retail investors, on the other hand, usually have to rely on their individual knowledge, resources, and expertise to make a fruitful investment decision.
As for the institutional investors, their primary intention of trading and investing is to increase their wealth, profits, and their Assets Under Management or AUM, all on an organizational level.
On the other hand, the retail investors typically make their investments and trade to meet their own financial goals.
The institutional investors trade very frequently, if not always, with hundreds or even thousands of transactions made in a single day.
However, this is not the case with the retail investors who, at the most, make a couple of smaller trades in a day.
In terms of the rules and regulations imposed, these are aimed to protect the retail investors.
However, in the case of the institutional investors, the rules are imposed in order to regulate their activities with each of them supervised by the higher and responsible authorities.
As for their individual control, it is done by their respective corporate laws as applicable.
In terms of liquidity, you will have it more as a retail investor since you will be able to buy and sell crypto assets at a much smaller scale.
The institutional investors however, on the other hand, find it harder to do so because their outsized purchase and sales have a much greater impact on the prices of the assets as well as on the market sentiment which may eventually result in panic selling.
Also, you will have more patience than the institutional investors who trade more frequently and often over-trade as well.
This is because they want to get results either quarterly or yearly and therefore end up paying higher fees sometimes for an investment that is not performing as well as it should be.
And finally, in terms of the educational background of each of these investors, a retail investor may or may not have a finance background to get started and still be successful but in the case of the institutional investors, they usually have a Master’s degree in any finance related major such as economics.
In addition to that, you will be better off as an institutional investor if you work as a finance intern or a collection agent first to get some hands-on experience.
Which is Better – Crypto Retail or Institutional Investing?
Ideally, no one among the institutional investors or retail investors is better because in today’s given scenario both are necessary and cause an impact on the crypto as well as other investment spheres by the virtue of each.
Therefore, focus on which particular investment path you would want to take up to make it big as a crypto investor.
Typically, the institutional investors are those players in the crypto space who are established, big, recognized, resource-rich and well-funded so that they can invest and manage crypto assets worth billions of dollars on behalf of their clients.
These players include and are not limited to:
- Investment banks
- Insurance companies
- Hedge Funds
- Mutual Funds
- Pension funds and
- Big private equity investors.
If you do not know already, there is a separate class of funds appearing in the crypto market since 2017 such as Crypto Funds, Hedge Funds, and Funds of Funds.
The institutional investors get a chance to invest in different investment vehicles and opportunities apart from cryptocurrencies.
Especially in the crypto market, they can invest in coins in their Venture Capital, IDO rounds and seed funding. In turn they earn commissions or a percentage of profits from their clients.
Ideally, if you consider the figures of the United States alone, more than 85% of the total volume of trade is made by institutional investors.
This shows why they have a strong influence in the price of the assets as well as in the market sentiments.
And, being extensively knowledgeable and managed by professional financial experts, they are less likely to make any uneducated and unproductive investments.
On the other hand, the retail investors are those players in the crypto market who buy and sell crypto coins or any other investments mainly on their own.
However, they can also go through a broker or an agent as well.
They often follow a diverse range of trading and investment strategies that they gather from different information and learning channels such as YouTube, social forums, and finance blogs.
However, due to their relatively and significantly smaller buying power of the retail investors than the institutional investors the SEC or Securities and Exchange Commission often bars them from making complex and riskier investments.
When you work with an institutional or a retail investor, it is good to weigh the pros and cons of them both to choose the right one for you and ensure you have a smoother investment path to tread on.
Some of the significant benefits of being or working with an institutional investor includes working with a large portfolio and access to a lot of data and info related to the industry.
The assets are also greater in number and are usually funded by the shareholders or clients which you can trade at lower fees.
This enhances your chances to invest more capital with a lot of support provided by others.
Also, as an institutional investor, you will have access to even those products and investments which are not available to small businesses or other prospective investors due to the federal securities rules on financial products, for example, an Initial Public Offering or IPO.
On the other hand, some of the most notable benefits of working in retail investment, whether you are an active or a long-term investor, are working with a more diverse portfolio consisting of low-priced assets.
You will also have more motivation since you will be dealing with your own money in this case along with more freedom to choose the type of asset you want to invest into.
You will also be able to play a long game as a retail investor. You will be better off since you will be less interested to make profits from the market corrections in the short term or the modifications and revisions made.
If the investment is worthy, you will make a lot of profit in the long run from your investment.
Retail investors are also able to make smaller investments which are much easier and faster to make as compared to the large investments made by the institutional investors.
This enables them to make the most out of the market conditions without missing out on any opportunity due to a much reduced wait time.
As a retail investor you will also be able to cash out and hold cash by selling off your holding when the price of a particular crypto coin is high and wait for the price to fall for a better buying.
This will further improve your investment opportunities and you can expect a much higher return on them.
At this stage, it is good to know that, over the past few years, the online brokerage platforms along with several other factors and developments in the finance sector has narrowed the gap between retail traders and institutional investors.
However, there still are significant advantages between them which provide a notable edge to the institutional traders.
However, in some special conditions, a retail investor or trader may become an institutional trader or investor.
For example, when they start to invest and trade on behalf of their friends and family. If they are successful they can even organize a small investment fund.
This is further facilitated by the advent of different FinTech platforms that have leveled the playing field for the retail investors.
Some of the notable aspects in which such changes are made are:
- Lowering the trading fees and lower or even zero minimum deposits
- Allowing better access to market data, information, trading tools and signals and
- Offering access to a larger variety of assets to both.
Moreover, the Decentralized Financial apps, commonly referred to as DeFi apps, have also grown significantly in popularity over the years due to their ability to provide more investment opportunities to both the retail and institutional investors.
These opportunities hardly existed before and such investments are also made easy due to the more advanced and industry specific apps and tools.
Some of these apps and tools are:
- Enterprise platforms that help the asset management and crypto-native firms to manage their assets and holdings securely and seamlessly as well as to interact with several DeFi platforms while adhering to the relevant laws and being complaint
- Full-stack crypto banks that offer facilities that are much similar to those provided by the traditional banks and can be used by the institutional and retail players and brokers and
- Proprietary transaction signing and key management technology that allows a better and more flexible governance to ensure superior security, flawless interoperability with legacy systems, and plug-and-play API connectivity.
All these come with blockchain based architecture so that they are applicable on any use case on-chain.
Therefore, now new businesses and retail investors can connect their current systems and work like the traditional financial players without needing to spend a lot of money and time on a complete revamp in the IT infrastructure.
They do not even need to make any expensive modifications in their current business processes.
There is a lot of difference between retail investors and institutional investors in crypto though the gap between them seems to become narrower gradually. This article surely has helped you in knowing them and in making the right choice.
I have special interest in crypto and intend to help common people to gain knowledge about the digital asset as well as its potential. Follow Me at Linkedin.