A familiar face is back in the cryptocurrency ecosystem. Lured by the prospect of quick profits in a rapidly appreciating asset class, retail investors are returning for a second run in the crypto ecosystem. The 2017 bull run in crypto markets was largely fueled by retail investors. At that time, their entry helped push Bitcoin (BTCUSD) into mainstream consciousness and increased its price volatility. But the circumstances this time may be different.
Key points to remember
- Retail investors, who propelled the first cryptocurrency bull run, are making a comeback in the ecosystem.
- Unlike last time when they exited after posting profits, retail investors could be in crypto for the long haul this time around.
More users and transaction volumes
After a price coma that lasted more than two years, Bitcoin has become a popular investment tool for traditional investors thanks to digital platforms. Google searches for Bitcoin reached Google-searches-really-drives-bitcoin-price/” data-component=”link” data-source=”inlineLink” data-type=”externalLink” data-ordinal=”1″ rel=”noopener noreferrer”>crypto mania levels, and trending topics on Twitter have helped highlight cryptocurrency price spikes. eToro, a crypto-trading platform, reported the addition 200,000 new users in the first week of this year.
Out of this figure, the company said that it had 61% and 49% more Bitcoin and Ether (ETHUSD) unique holders compared to last year. Unsurprisingly, the Israel-based company’s trading volumes were up 10x compared to the same period last year.
In the United States, several top exchanges such as Coinbase and Kraken suffered outages due to renewed interest, some presumably from new users, in trading cryptocurrency on their sites. Revolut, a UK-based banking and shopping app, saw an influx of 300,000 new crypto customers over the past month. Meanwhile, online payment company PayPal Holdings, Inc. (PYPL), which launched encryption facilities for its users last year, is also reported having made $242 million in cryptocurrency sales – a record – in one day recently.
Another repeat of 2017?
Some commentators point to the entry of retail investors and PayPal numbers as a sign of widespread cryptocurrency adoption. But that might be overkill. Retail investors and traders exited the crypto markets after posting profits in the previous bull run. They might do the same this time too. The pseudonymous nature of Bitcoin transactions, in which real identities are obscured by crypto addresses that may or may not belong to the same entity, also means that analysts should lift their assessment of crypto numbers with a healthy dose of skepticism.
Even though the cryptocurrency ecosystem looks similar to 2017, its underlying fundamentals have changed. During the previous bull run in the crypto markets, small transactions by retail investors drove up Bitcoin price volatility. Without much underlying liquidity, prices moved haphazardly, rising and falling alternately, as traders moved money in or out of the crypto ecosystem.
The current cryptocurrency price rally has occurred in a different landscape. Institutional investors are slowly but surely making their way into the crypto ecosystem. Their presence has brought much-needed liquidity to the crypto markets, making them less susceptible to wild price swings from small trades.
The regulatory guardrails allowing retail investors to get into bitcoin this time around are also stronger. For example, the UK’s Financial Conduct Authority (FCA) last month launched a temporary registration scheme allowing investors to check whether crypto trading firms are registered with the regulator. In the United States, the Office of the Comptroller of Currency (OCC) has issued favorable opinions on cryptocurrencies, and a new SEC chieffamiliar with blockchain and cryptocurrencies, is set to succeed former chairman Jay Clayton, who was widely reviled by crypto enthusiasts for his harsh statements on cryptocurrencies.
All of this means that retail investors may not be leaving the crypto markets anytime soon.