Institutions Suck at Trading Crypto

...but individual investors aren’t much better, initial research shows.

Chris Ratcliffe/Bloomberg

Chris Ratcliffe/Bloomberg

When it comes to trading cryptocurrency, institutional investors tend to underperform individuals on a risk-adjusted basis, new research shows.

Part of the reason for less-than-stellar performance for both institutions and individuals, according to researchers at the University of Hong Kong and Georgetown University, is that neither have particularly diversified cryptocurrency portfolios.

Cryptocurrency prices have skyrocketed in recent years, and more institutions have signaled they are open to including the asset in their portfolios. This study is one of the first that analyzes how cryptocurrency investors behave using exchange-level data.

“There was this huge hype for crypto, for good reasons, and prices have increased dramatically,” said Alberto Rossi, associate professor of finance at Georgetown, by phone Monday. He, along with Qing Chan, Wenzhi Ding, and Chen Lin, all from the University of Hong Kong, published a working paper on their findings on Friday.

On a risk-adjusted basis, individual investors outperform institutions, the research showed. The risk-adjusted return of crypto purchases over relatively short time horizons (one to 70 days), ranges from 0 percent to a loss of 0.3 percent for individuals, and losses of between 0.5 percent and 0.7 percent for institutions.

The data that showed this was shared by an anonymous cryptocurrency exchange in Hong Kong. It contained information on individual characteristics, positions, trades, and logins. It’s important to note that the investors self-identified as institutions, rather than individuals.

According to Rossi, the exchange that provided data to the researchers isn’t the largest, but it ranks among the top 150 exchanges in the space.

The researchers found that institutions do not have well-diversified crypto portfolios. On average, they hold just four currencies, the paper said.

“They don’t seem to be spreading their portfolios across the different cryptocurrencies, but instead are focusing on Ethereum and Bitcoin,” Rossi said. “There’s not that big of a set of cryptocurrencies to invest in because of liquidity.”

But, he added, that doesn’t mean that they can’t diversify. Rossi said that investors would benefit from having portfolios of between 10 and 15 currencies.

“Some of the big upswings, they lose out on them, and they don’t benefit from the diversified portfolios that they could create,” Rossi said.

[II Deep Dive: Wall Street’s Crypto Cold War]

The researchers were also able to learn about how institutions trade cryptocurrency. They are more active than individuals, but their cryptocurrency portfolios are small.

Institutions trade more actively on the exchanges than their individual peers, averaging 32,614 trades per month. The average retail investor traded 464 times.

Institutional crypto portfolios on the exchange also tended to be small compared to overall investment holdings: the average institutional portfolio held $47,877, the paper said. The researchers said that the size of the portfolios compared to the size of institutions overall suggests that they are still “reluctant” to put money to work in cryptocurrency.

Rossi said he and his fellow researchers plan to spend more time covering the subject.

“Our hope is that we’ll keep working on how cryptocurrency investors behave, whether they have behavioral biases, and what their mistakes are,” Rossi said. “Then we can inform the public.”