4 min read · Jun 22, 2023
Most platforms cater to both institutional and individual investors, despite their many differences.
Pioneers and early adopters are usually private individuals who are ready to take risks to test new ideas. Large firms and organizations enter the market only once a new idea has proven its viability and mass adoption.
Cryptocurrencies too. Crypto coins, businesses, and services have struggled to attract large institutions to invest in and utilize blockchain-based technology throughout the past decade.
That’s changing fast. How is institutional crypto investing different from retail investing by individuals? Many huge institutions are becoming interested in crypto.
To answer, define institutional and ordinary investors.
Institutional Investors
Institutional investors are large, well-known, well-funded, and resource-rich financial actors. Pension and mutual funds, hedge funds, insurance firms, investment banks, and big private equity investors handle billions of dollars for clients. Since 2017, crypto markets have seen Crypto Funds, Funds of Funds, and Hedge Funds.
These investors use borrowed money but can reinvest their profits. Their investments are usually big honeypots of monies from hundreds of people that the fund or organization invests in various possibilities or vehicles like cryptocurrencies. This money is professionally managed by specialists who receive commissions, a percentage of returns, or both to maximize investment prospects for their clients. These professionals earn from complicated financial tactics.
Institutional investors can access investments with high minimum funding/investment floors and negotiate better fees due to their size and money. Institutional investors can buy tokens in VC, seed, and IDO rounds in crypto markets.
Retail Investors
Retail investors are non-institutional. Retail investors buy and sell crypto and other investments on their own or through brokers, agents, or institutional services providers. Retail investors use a variety of ways to generate money, learning through finance blogs, YouTube videos, and social forums.
Institutional vs. Retail Investors
Since we know more about the players, here are more differences.
Investment Size
Institutional investors invest enormous sums in individual investments. They won’t invest a modest amount in crypto. They do their research and invest tens or hundreds of millions of dollars in promising investments. These significant investments affect pricing and liquidity.
Retail investors may invest a few thousand dollars or less in investments they think will pay off. This could be a single crypto token or a fraction. Individually, these investments have little market impact.
Analytical Strategy
Institutional investors use advanced analytics-based tactics to invest. Institutional traders use automated arbitrage, fund rebalancing, mean reversion, scalping, the Ichimoku cloud strategy, and triangle arbitrage. Many of these tactics are unfamiliar and demand a lot of processing power and financial knowledge.
Retail investors usually use dollar-cost averaging, day trading, or long-term holding. They may buy low and sell high or invest and forget about it until they need to sell.
Risk Appetite
Institutional investors are more risk-averse than individual investors since they invest funds on behalf of their clients. Institutional investment products come in various varieties, some riskier than others. These investments target high- and low-risk investors.
Retail investors vary in risk. Younger traders with minimal obligations and personal costs often chose high-risk/high-reward bets to make big returns. Retirees and those with many responsibilities favor lower-risk investments.
Asset Ownership, Compliance, and Governance
Institutional investors face more governance and compliance challenges due to tight corporate laws. As a result, retail investors may be able to invest in a non-compliant manner for many sorts of assets, though oversight agencies attempt to assure compliance with all relevant regulations.
Retail investors own their investments. Retail investors own crypto tokens and assets. Institutional investors may own their investments. Even though a hedge fund manages and makes investment decisions, its clients control the crypto project or utility tokens they buy. Private equity firms that invest in startups or other investment possibilities will control the digital tokens or project they invest in.
Asset Protection
Institutional services providers can secure and hold funds for retail investors. Coinbase will store digital tokens for customers.
Institutional players must secure and hold custody of the assets they buy, but a new category of services providers, custodial services providers, are increasingly providing custody services to institutional players, similar to retail investors.
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