Bitcoin’s big month: Did US institutions prevail over Asian retail traders?

There may be no single reason for BTC’s 39% January price gain, but some suspect institutional investors. Can their impact be quantified, though?

Bitcoin experienced the second-strongest January in its history — and the best since 2013 — rising nearly 40% amid wide reports that institutional investors were back on board.

Zhong Yang Chan, head of research at CoinGecko, told Cointelegraph that there were “net institutional inflows into digital asset funds in January 2023, particularly in the last two weeks, with Bitcoin the largest beneficiary.”

Meanwhile, a Jan. 30 CoinShares blog noted that the total assets under management in digital asset investment products — a good gauge of institutional participation — had risen to $28 billion, led by Bitcoin (BTC), which was up 43% from November 2022’s low point in the current cycle.

The reasons for this bullishness varied depending on whom one asked, ranging from macro factors like a pause in inflation growth to more technical reasons like a squeeze on BTC short sellers. Elsewhere, a research report from Matrixport noted that institutional investors are “not giving up on crypto,” further suggesting that as much as 85% of Bitcoin buying in January was the result of U.S. institutional players. The cryptocurrency services provider added that many investors had used the U.S. Jan. 12 Consumer Price Index print “as a confirmation signal to buy Bitcoin and other crypto assets.”

Almost all gains were during U.S. market hours

But how did Matrixport come to attribute up to 85% of monthly BTC growth to U.S. institutional investors? As the Singapore-based firm explained in its recent market overview: “The most astonishing statistic is that almost all of the +40% year-to-date rally in Bitcoin has happened during US market hours. […] That’s 85% of the Bitcoin move.” Matrixport continued:

“We have always worked with the assumption that Asia is driven by retail investors, and the US is driven by institutional investors.”

So, if Bitcoin’s market price rises during U.S. market trading hours but falls during Asian trading hours, as seemed to be happening in January, can one assume that U.S. institutional investors were buying Bitcoin while Asian retail traders were selling it — a sort of yin-and-yang action? Apparently so. During U.S. trading hours, “institutions, aka ‘stable hands,’” were taking advantage of the dips, added Matrixport.

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Is this really what drove BTC’s price upward in January? “In my personal opinion, the assumption that Asian retail and U.S. institutional investors are two main drivers of net Bitcoin flows is valid,” Keone Hon, co-founder and CEO at Monad Labs — which developed the Monad blockchain — told Cointelegraph. There are other market participants, of course; but when looking at flows, “irregular ones” have the largest impact, continued Hon:

“In the current market, institutional players represent a potentially new — or renewed — source of demand similar to early 2021. Meanwhile, on the retail side, Asia-centric exchanges like Binance, Bybit, Okex and Huobi represent a majority of spot volume and nearly all of the derivatives volume.”

Others, though, aren’t so sure. “There is no way to confirm that U.S. markets are driven by institutional investors and Asian markets are driven by retail players since we don’t have data related to the identity of traders,” Jacob Joseph, research analyst at CryptoCompare, told Cointelegraph.

Granted, there is a “sentiment” or belief that large retail interest exists in Asia, “especially in Korea, as KRW represents the fourth-largest trading pair after USDT, BUSD and USD,” continued Joseph, but it can’t really be quantified.

Still, he acknowledged that the Matrixport report was interesting, adding, “Our data shows that more than two-thirds of the BTC returns in January can be attributed to the U.S. market hours, and our historical hourly data also shows that an above-average volume is traded during these hours.”

Justin d’Anethan, institutional sales director at the Amber Group — a Singapore-based digital asset firm — told Cointelegraph, “I don’t really have metrics to say whether 85% is on point or not.” He was inclined to see the January rally as broad and macro-driven, especially with inflation heading lower and expectations that the U.S. Federal Reserve won’t keep raising rates. He added:

“You can see equities, gold, real estate, and, yes, crypto gaining. That’s probably driven by large institutions and smaller investors alike, especially when FOMO kicks in.”

D’Anethan also looked at Coinbase’s recent premium index, “which is in the green but not massively. That’s typically a good metric to see if bigger American entities are on a shopping spree. Right now, it looks muted, positive, but probably just reallocating cash that was sitting on the sidelines.”

Jacob said that a better way to gauge U.S. institutional activity is to look at exchanges “that cater their services solely to them.” Along these lines, “CME Group, the largest institutional exchange in crypto, saw its monthly volume rise 59% in January,” while LMAX Digital, another institutional-focused exchange, “also saw its trading volumes rise 84.1%, higher than the average increase in trading volume on other exchanges.”

Then, too, who’s to say Asian retail traders aren’t operating during U.S. market hours? Chan, for instance, acknowledged that while the markets “do tend to move more during U.S. hours,” CoinGecko believes that this is “more a reflection of the outsized influence that U.S. monetary policy currently has on the crypto market and broader financial markets. Traders are most active when they believe markets are volatile, and in the current environment, Asian traders may have also gravitated toward ‘Fed watching’ to catch potential market movements.”

Chris Kuiper, director of research at Fidelity Digital Assets, told Cointelegraph that there isn’t a single event or catalyst that one can point to, to explain Bitcoin’s recent price movement. But to him, “It’s not surprising given the conditions that have been forming — namely, the increasing amount of illiquid coins, coins that haven’t moved in over a year — and the continued outflow of coins from exchanges.” Both factors make for a lower supply of BTC “and create conditions ripe for higher moves.”

Kuiper also cited the futures and derivatives market as a factor in BTC’s climb, “with a large amount of shorts getting liquidated over the past few weeks.” D’Anethan, too, mentioned “short-sellers getting squeezed” as a possible driver. “In itself, it’s not a cause for [prices] going up, but when things do rise, it accelerates it.”

Looking ahead

Be that as it may, if one agrees that January held some promise for Bitcoin on the institutional front, can one necessarily assume that it will persist through 2023?

“As the market gains clarity on which players avoided contagion, we’ll see an uptick in new entrants that were sidelined during the back half of last year, particularly as innovative custody agreements emerge to address the major pain points of the recent collapses,” David Wells, CEO of digital asset trading platform Enclave Markets, told Cointelegraph.

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More needs to be done to maintain institutional momentum, the executive stated. “To really attract institutional flow, crypto markets will need to build more sophisticated products that allow for proper hedging and risk management,” added Wells. He’s optimistic providers will rise to the challenge, however.

It appears that inflation may have peaked, and many expect the U.S. Fed and perhaps other central banks to slow the pace at which they tighten interest rates, said Kuiper. While that does not necessarily portend rising risk-asset prices, “institutions and other asset allocators in the longer-term may once again turn to Bitcoin if central banks ease aggressively as they have done in the past,” he concluded.