Institutional Traders Favor Bitcoin Over Altcoins (2024)

By: Alex Lari

Source: Institutional Traders Favor Bitcoin Over Altcoins

Critics:

ETF shares are created and redeemed when largebroker dealerscalledauthorized participants(AP) act asmarket makersand purchase and redeem ETF shares directly from the ETF issuer in large blocks, generally 50,000 shares, calledcreation units. Purchases and redemptions of the creation units are generallyin kind, with the AP contributing or receivingsecuritiesof the same type and proportion held by the ETF; the lists of ETF holdings are published online.

The ability to purchase and redeem creation units gives ETFs anarbitragemechanism intended to minimize the potential deviation between the market price and thenet asset valueof ETF shares. APs providemarket liquidityfor the ETF shares and help ensure that their intraday market price approximates thenet asset value of the underlying assets.Other investors, such as individuals using a retail broker, trade ETF shares on thesecondary market.

If there is strong investor demand for an ETF, its share price will temporarily rise above its net asset value per share, giving arbitrageurs an incentive to purchase additional creation units from the ETF issuer and sell the component ETF shares in the open market. The additional supply of ETF shares reduces the market price per share, generally eliminating thepremiumover net asset value. A similar process applies when there is weak demand for an ETF: its shares trade at a discount from their net asset value.

When new shares of an ETF are created due to increased demand, this is referred to as “ETF inflows“. When ETF shares are converted into the component securities, this is referred to as “ETF outflows“. ETFs are dependent on the efficacy of the arbitrage mechanism in order for their share price to track net asset value.

Tokens, cryptocurrencies, and other digital assets other than Bitcoin are collectively known as alternative cryptocurrencies,typically shortened to “altcoins” or “alt coins”,or disparagingly “sh*tcoins”.Paul Vigna ofThe Wall Street Journalalso described altcoins as “alternative versions of Bitcoin”given its role as the model protocol for altcoin designers. Altcoins often have underlying differences when compared to Bitcoin. For example,Litecoinaims to process a block every 2.5 minutes, rather than Bitcoin’s 10 minutes, which allows Litecoin to confirm transactions faster than Bitcoin.

Another example isEthereum, which has smart contract functionality that allows decentralized applications to be run on its blockchain. Ethereum was the most used blockchain in 2020, according to Bloomberg News. In 2016, it had the largest “following” of any altcoin, according to theNew York Times. Significant rallies across altcoin markets are often referred to as an “altseason”. Stablecoinsare cryptocurrencies designed to maintain a stable level ofpurchasing power.

Notably, these designs are not foolproof, as a number of stablecoins have crashed or lost theirpeg. For example, on 11 May 2022,Terra‘s stablecoin UST fell from $1 to 26 cents.The subsequent failure ofTerraform Labs resulted in the loss of nearly $40B invested in the Terra and Luna coins.In September 2022, South Korean prosecutors requested the issuance of anInterpol Red Noticeagainst the company’s founder,Do Kwon. In Hong Kong, the expected regulatory framework for stablecoins in 2023/24 is being shaped and includes a few considerations.

As the first big Wall Street bank to embrace cryptocurrencies,Morgan Stanleyannounced on 17 March 2021 that they will be offering access toBitcoinfunds for their wealthy clients through three funds which enableBitcoinownership for investors with an aggressive risk tolerance.BNY Mellon on 11 February 2021 announced that it would begin offering cryptocurrency services to its clients.

On 20 April 2021, Venmo added support to its platform to enable customers to buy, hold and sell cryptocurrencies.In October 2021, financial services companyMastercardannounced it is working with digital asset managerBakkton a platform that would allow any bank or merchant on the Mastercard network to offer cryptocurrency services.

There are also purely technical elements to consider. For example, technological advancement in cryptocurrencies such as Bitcoin result in high up-front costs to miners in the form of specializedhardwareandsoftware. Cryptocurrency transactions are normally irreversible after a number of blocks confirm the transaction. Additionally, cryptocurrency private keys can be permanently lost from local storage due to malware, data loss or the destruction of the physical media.

This precludes the cryptocurrency from being spent, resulting in its effective removal from the markets. In 2018, an increase in crypto-related suicides was noticed after the cryptocurrency market crashed in August. The situation was particularly critical in Korea as crypto traders were on “suicide watch”. A cryptocurrency forum on Reddit even started providing suicide prevention support to affected investors.The May 2022 collapse of the Luna currency operated byTerra also led to reports of suicidal investors in crypto-related subreddits.

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CryptoAltcoinsAre Outperforming With Bitcoin ‘Gravitating’ Toward $50,000BNN Bloomberg21:52 Fri, 08 Dec