News – of late – has been abuzz with stories detailing the charge of institutional investors into the digital assets sector. While the retail investors, who have kept crypto markets buoyant for over a decade, typically follow a self-service approach to their investment behavior, the new horde of institutional investors represent high-net-worth investors that are entering the space passively. Highlighting a different approach to investment than the incumbent crypto investor.
The – long and awaited – influx of intuitions, into the digital assets space has been, long purported, to be one of the key driving forces towards the goal of crypto asset adoption. The regulatory certainty -among other factors – appears to have reached a point where more high networth investors are plunging into the cryptocurrency arena. Their investment behaviour however, seems to be very different to the way retail investors have typically taken to crypto.
High-Net-Worth Investor Behavior
Before we understand how high-net-worth, and institutional investment behavior differs from retail investors, it’s probably a good idea to peer into the psyche of a typical retail investor. A 2018 survey, by Albany Law School Institute for Financial Market Regulation Director, Christine Chung, sheds some light into the general makeup of a retail investor’s decision making regimen. The study looks at the typical retail investor’s information seeking behavior (fundamentals,) the architecture of retail investor choice, the biases that influence those decisions, as well as the limits of education as a debiasing tool.
Although the Efficient Market Hypothesis (EMH) – which postulates that markets completely incorporate all available information of an asset into its market price – dictates that investors consistently make rational investment decisions, however that is usually not the case. As Professor. John Maynard Keynes once hypothesized in his 1936 book, Animal Spirits, the investment decisions of many investors, are driven by “Animal Spirits“. Thus, not altogether rational.
Regarding information seeking behavior, the researcher sought to ascertain the full depth of this particular factor of retail investor decision making, by asking the following questions: a) Do retail investors go out of their way to find information, tools, or advice prior to making an investment decision? b) If so, which informational materials do retail traders patronize? c) where they access aforementioned informational materials? d) Does the credibility of information sources affect decision making, and/or overall investment behavior?
Of the total number of survey respondents – 53% male, 8.1% aged under 30, 19,3% between ages 31, and 39, 13% aged 40-49, 19% from 50-59, 25.6% aged 60-69, with 14.2% making up the 70+ age category, all educated, and managing holding valued at -$50,000 (23.3%,) $50,000 -/$99.999 (13%,) $100,000 – $199,999 (15.1%,) $200,000 – $499,999 (19.3%,) $500,000 – $1,000,000 (13.9%,) with 15.4 managing an asset portfolio figured at over a million dollars – about 93% admitted to seeking out information, tools, and advice before executing a trade decision.
About 56.3% of respondents who reported actually doing investment research said they use technical data as their primary source of information, while 4.5% said they relied on company information, and 29.2% preferred charts. 46.8% of retail investors surveyed said they added advice to their mix. Splitting results by gender, 63% of males, and 49% of females sought data driven information, while 53% of males, and 37% of females sought information that was specific to the enterprise of interest. Suggesting that female investors are less likely to use mediated information resources, and the internet for investment decisions, and rely on personal, more intuitive, information.
Biases
Chung’s survey also focused on the potential influence that human biases have on retail investor’s decision making processes. Results found that retail investors are more likely to invest in familiar, and close-to-home assets. Which may negatively influence portfolio diversification, as investors may not always go for the highest profit potential. Trust, and the perception of credibility were also found to play a large role in retail investor decision making.
Research claims that people – in general – have a tendency to be over confident when making decisions, Chung looked into whether, or not,
our natural Optimism Bias has any influence on how retail traders decide on which assets to put their money into. The research found that respondents who identified as, confident, tented to take riskier investment action, and were mostly male. Investors falling into this category also tended not to take investment advice from third parties (portfolio managers, third party financial product pedlars), which is a – statistically proven – error-reducing practice.
The Institutional Investor’s Behavior
The above gives a clearer picture of the overall behavior of retail investors, taking a mixed, yet self-reliant, approach to information seeking, and investment execution. Not entirely rational, but – more often than not – relying on some data. Now let us piece together, the behaviour of institutional investors.
However, before we delve into those details, let us first come to the definition of what an institutional investor is. Basically, an institutional investor is an organization that undertakes investment activity on someone else’s behalf. Institutional investors leverage resources, and specialized knowledge to extract consistent returns from the buying, selling, and management of client assets. Banks, Mutual Funds, Endowment, Hedge, Pension, and Insurance funds fall into this category, and usually enjoy fewer regulatory restrictions than retail investors.
An article by James Quinn, Managing Director of Q9 Capital for Forkast.news discusses how high-net-worth individuals, in Asia, who have been turned on to digital assets have less of the Do-It-Yourself spirit of incumbent crypto investors, and opt to to have somebody execute investments on their behalf. Relationships also seem to be the name of the game, when it comes to higher-level investment. It’s an “I’ll call my broker” kind of world.
According to behavioral economist, Meir Statman, Institutional investors are driven by the same biases as institutional investors however, in depth knowledge of behavioral finance, and various other resources allow them an edge that enables them to identify, and correct mistakes early. Data, and algorithms, usually do much of the heavy lifting, for institutions anyway.
Digital Asset research outfit, Crypto Research – who reported that institutional demand for cryptocurrencies in Europe was on the rise – found that, of the European Institutional investors they had surveyed, the ones with the most interest in digital assets were Small Asset Managers, Large Asset Managers, High-Net-Worth Individuals, and Family Office’s. Which appears congruent with Mr. Quinn’s theory, if high-net-worth individuals behave the same everywhere, as the aforementioned institutional groups tend to represent the interests of wealthy investors.
Conclusion
The incumbent digital asset investor is a retail trader with some funds to spare, but usually approaches the information seeking, and investment decision process independently. Barely seeking advice, and acting of their own volition. High-net-worth crypto investors are beginning to enter this space – perhaps driven by uncertainty in classic markets, or attracted by exaggerated profit potential – however, the high-net- worth investor is more passive, opting to have an institution invest and manage their assets on their behalf.
Although they will not be – directly – involved in the play-by-play management of their asset portfolios, their funds, entering crypto markets, may buoy digital asset prices to new heights, but may also lead to high-net-worth individuals – through the institutions they invest with – literally, calling the shots on where markets go.
