Could cryptos be facing an upcoming wave of institutional selling?

The majority of investors who’ve bought Bitcoin or Ethereum since late 2020 are underwater.

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Key points

  • Cryptos have been sliding since November 2021
  • At current prices, most investors who bought crypto since late 2020 will be sitting on losses
  • Institutional investors could be looking to liquidate their loss-making digital assets

Cryptos haven’t had the best of years so far.

Last month alone, the total market cap of the global crypto market fell 28%.

Hammered by rising interest rates, few tokens have been spared from the sharp sell-off over the past seven months.

Bitcoin (CRYPTO: BTC), the world’s original digital token and still the biggest by market cap, has lost 37% of its value this year. On Friday afternoon it was trading for US$30,108 (AU$42,372). The 2022 losses now put the Bitcoin price down 56% from its 10 November all-time high of US$68,790.

The Ethereum (CRYPTO: ETH) price has fared even worse. The world’s second-biggest token, which runs the biggest blockchain, is down 52% this calendar year. At Friday’s price of US$1,792, Ethereum has lost 63% since hitting its own record high of US$4,892 on 16 November.

Similar or even larger losses have impacted the majority of top cryptos.

Cryptos up with the easy money, down with the tightening

Commenting on the struggles facing the digital asset sector over the past seven months, Kara Murphy, CIO of Kestra Holdings, said (quoted by Bloomberg):

It feels very much to me like crypto is also subject to a lot of the monetary cycle that’s been hitting the more traditional asset classes. Looking at the rapid increase in crypto prices, it seems clear that they really benefited from easy-money policies, and now that the money is coming out of the system, that’s a good part of the reason why crypto is declining more recently.

Taking Bitcoin as our proxy for the broader crypto market, investors who bought the token prior to November 2020 will still be sitting on comfortable gains. In October 2020, Bitcoin was still trading for US$10,200.

The same can’t be said for the majority of investors who bought Bitcoin or most altcoins in January 2021 or beyond.

With losses racking up, could we be about to see a wave of selling?

Institutional investors may be the weak hand

According to digital asset broker Bequant, only 51% of anonymous Bitcoin addresses are in the green. That means almost half bought their Bitcoin at prices higher than they can sell them for today.

Now we’re unlikely to see a wave of selling from those crypto investors who bought at far cheaper prices a few years ago, said Wilfred Daye, chief executive officer of Securitize Capital.

But we may be looking at a scenario where it’s the institutional investors who could be the first to cut and run.

According to Daye (quoted by Bloomberg):

There may be capitulation because larger institutional players, guys who got in during the current cycle, they’re at risk of selling their assets and liquidating their assets. This particular cycle that started late 2020, you had a lot of institutional folks getting in at a higher price, so I think it’s more institutional capitulation.

We’re already seeing a surge in Bitcoin miners moving their holdings to public exchanges, where they could be sold.

As the Motley Fool reported on Monday, Bitcoin miners, under pressure from rising costs and falling prices, transferred US$6.3 billion in Bitcoin to exchanges in May.

Of course, this doesn’t mean a wave of institutional crypto selling is imminent. In the fast-moving world of digital assets, any number of factors could turn sentiment around.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin and Ethereum. The Motley Fool Australia has positions in and has recommended Bitcoin and Ethereum. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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