CRYPTO

Wall Street Takes Lead in Crypto Investments

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Institutional clients traded $1.14 trillion worth of cryptocurrencies on exchange Coinbase Global Inc.

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in 2021, up from just $120 billion the year before, and more than twice the $535 billion for retail.

Retail traders understood bitcoin’s market in the early years and traded on exchanges that offered a single bet: buy or sell bitcoin, 24 hours a day, seven days a week. That resulted in a small, erratic market that could be easily moved by modestly sized trades.

“It’s a completely different game now than it was,” said Leah Wald, the chief executive of Valkyrie Funds, which sells crypto-focused exchange-traded funds.

Those retail investors are still there, but they have been joined by hedge funds, registered investment advisers and some companies, said Gil Luria, a strategist at DA Davidson who has been studying bitcoin since its early days. Even El Salvador has become a buyer. “They’re all new,” he said.

The growth in professional investors underscores the rapid mainstreaming of cryptocurrencies in recent years. Venture funds invested billions in cryptocurrencies in 2021—and crypto exchanges have amped up their marketing dollars to try to become household names.

A survey of 300 institutional investors conducted by State Street in October found that more than 80% were now allowed to have exposure to cryptocurrencies. Large funds with assets of $500 billion or more under management were the most bullish, and nearly two thirds of them had dedicated staff for the crypto market.

The only major institutional group that wasn’t in the market, State Street found, were sovereign-wealth funds, though it predicted they would be within two years.

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The growth of institutional investment has changed the way cryptocurrency markets behave. Now, digital markets have started to mirror traditional markets.

Professional traders see it as one asset inside a diversified portfolio, Mr. Luria said. They hold it because it promises outsized returns compared with other assets, and they trade like any other risk asset.

That is why bitcoin has recently been trading largely in lockstep with tech stocks, said Lucas Outumuro, an analyst for research firm IntoTheBlock. The fear of rising rates and changing policy at the Fed is lowering the interest in risk assets, decreasing buyers in the market and boosting correlations. In January, bitcoin’s correlation to the tech-dominated Nasdaq 100 was at its highest level since April 2020, he said.

The Nasdaq Composite Index is down 14% year to date, with investors concerned about inflation, interest rates, the economy and war in Ukraine. Bitcoin is down 18%.

The crypto market’s offerings have grown to adapt to its new investors. There are myriad derivatives exchanges, and trading desks and automated services that allow investors to add leverage to their bets.

A group of about 6,000 crypto investors known as CityDAO bought 40 acres of land in Wyoming. WSJ’s Paul Vigna explains how this decentralized autonomous organization, or DAO, came to own this land. Photo illustration: Josephine Chu

Investors in those kinds of financial products comprehend a majority of the dollar volume of trading. IntoTheBlock tracks transactions of more than $100,000 as a proxy for these kinds of professional investors and firms. In the fourth quarter of 2021, those transactions represented 99% of total volume traded, the firm said.

Crypto hedge funds have proliferated in response to that demand. There are about 856 operating today with $68 billion in assets under management, according to data from Crypto Fund Research, up from 31 managing less than $1 billion at the end of 2016.

In fact, about the only thing that hasn’t changed is bitcoin’s volatility, said Nicholas Colas, the founder of research firm Data Trek. Usually, as assets grow in size and achieve critical mass, they become less volatile.

“That’s not the case with bitcoin,” he said. “It’s just as volatile now as it was five years ago.”

Write to Paul Vigna at Paul.Vigna@wsj.com

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