Institutional investors are becoming more involved in the $220 billion cryptocurrency market than many observers may realize.
Buyers such as hedge funds have replaced high-net-worth individuals as the biggest buyers of large swaths of digital coins worth more than $100,000 through private transactions, according to Bobby Cho, global head of trading at Cumberland, a Chicago-based cryptocurrency trading unit of DRW Holdings LLC, which handles the over-the-counter purchases.
"Wait until institutional investors embrace crypto" has long been the rallying cry for digital-currency enthusiasts as prices surged and collapsed in the past year amid shifting expectations for regulatory acceptance of the asset class.
Meanwhile, the big sellers — miners, whose computers generate coins by confirming transactions — have begun scheduling regular coin sales instead of holding or waiting to offload them during market rallies. Many of the largest miners have also set up their own liquidity desks and operations.
"What that's showing you is the professionalization that's happening across the board in this space," Mr. Cho said. "The Wild West days of crypto are really turning the corner."
The over-the-counter market facilitated anywhere from $250 million to $30 billion in trades per day in April, according to researchers including Digital Assets Research and TABB Group. Exchanges have recently handled about $15 billion in daily trades, according to CoinMarketCap.com.
"We've seen triple-digit growth enrolling in our OTC business," said Jeremy Allaire, chief executive office of Boston-based Circle Internet Financial. "That's a big growth area."
While the OTC market has declined along with cryptocurrency prices, it likely hasn't dropped as much as volume on exchanges, which is down 80% since its peak, according to Digital Asset Research. Many institutional buyers have dived into cryptocurrency recently because the market has failed to rally, Mr. Cho said.
"One of the biggest criticisms of crypto by institutional investors has been the volatility," Mr. Cho said. "Over the last four to six months, the market has been trading in a very tight range, and that's seems to be corresponding with traditional financial institutions becoming more comfortable diving into the space." A third of DRW's transactions are happening during Asia hours, he said.
Large buyers and sellers like private sales because transactions on exchanges can move coin prices. In a private sale, parties can fix the price in advance, instead of worrying about a sudden plunge or spike just as the transaction takes place.
"If they are liquidating [coins], they are liquidating them via OTC," said Tom Flake, founder of Bcause, a provider of mining facilities whose customers are institutional miners with hundreds to thousands of machines. The largest miners also sell their coins to sellers directly or through brokers.
One of the biggest reasons to buy coins outside of exchanges, though, is that there are often not as many coins offered for sale as the institutional buyers would like to buy, according to Sam Doctor, managing director and head of data science research at Fundstrat Global Advisers.
"At this point in time, because more and more institutions are beginning to enter the market, there's more of an imbalance," Mr. Doctor said. That's why brokerage firms are springing up to help institutional buyers find inventory, he said.
What's more, miners can offer something unique: brand-new, "virgin" coins, which some investors covet. Such coins command a premium of up to 20%, according to Travis Kling, founder of the hedge fund Ikigai. It's easier to prove they've not been involved in money-laundering operations, he said.