The rise of retail trading has become evident in the meteoric growth of Robinhood and the GameStop saga that pit institutional short sellers against retail traders. While institutional investors have taken an interest in Bitcoin, the dramatic rise of Dogecoin and other fringe cryptocurrencies has underscored the surge in retail participation in the market.
Let’s take a closer look at the retail trading in crypto, the resulting retail revival, and what it means for long-term investors and the wider crypto market.
First Things First: What Is Retail Trading Crypto?
Much like just retail trading in general, crypto retail trading or retail trading in crypto is the process of retail investors or individual investors trading with their personal money rather than on behalf of an institution (institutional traders) to add to personal wealth.
While only huge and established corporations like Microsoft and Reeds Jewelers cryptocurrency payments up until lately, online retailers on Shopify have also now entered the league which speaks volumes about retail cryptocurrency.
Why Are Solo Retailers Accepting Cryptocurrency?
While there still may be a lot of doubt and suspicion around the acceptance of blockchain-based virtual currencies as a method of payment, here are some benefits that drive the retailers to do so:
- Higher payment security: Accepting digital, blockchain-based currency as a payment option saves retailers falling prey to common frauds typically reported on standard bank-based credit card payment systems. This is particularly true when retailers need to accept payments from foreign buyers
- Enhanced customer confidence: Payments acceptance in cryptocurrency from services that secure access to the individual’s cryptocurrency balance adds to the consumer's confidence
- The non-reversibility feature that does not allow charge-backs once a purchase is dealt
- No transaction size ceilings: Blockchain currency does not impose a limit or a size on the value of transactions
- Lower exchange fee: Blockchain currency processing fees are lower than traditional currencies. Since the processing fee is often borne by the buyers, it adds to their purpose
- Consumer demand: With more and more individuals holding crypto in the present day, many online retailers are even pushed to accept the idea of retail cryptocurrency in order to avoid a business loss
Retail Investors In Blockchain Slows Institutional Investment
Institutional involvement in the crypto space has experienced a dramatic increase over the past year. According to Coindesk, the Chicago Mercantile Exchange volume rose from roughly $150 million in April 2020 to more than $2 billion by February of 2021. A growing number of mutual funds have added crypto exposure while exchange-traded funds seek to list.
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That said, in recent months, the institutional investment seems to have stalled as retail-friendly Binance and Bybit have overtaken the institution-friendly CME in open interest. Futures volume has also picked up as a percentage of total volume, which suggests a shift from long-term investment to short-term speculation, according to Noelle Acheson of Coindesk.
The dramatic rise in Bitcoin addresses also suggests that retail traders are increasingly interested in the retail cryptocurrency market. According to blockchain data, the number of unique addresses holding at least 0.01 BTC rose from 8.96 million to over 9 million in the days leading up to Coinbase’s IPO while those with a minimum balance of 1,000 BTC fell from 2,240 to 2,228.
The meteoric rise of Dogecoin is another sign of growth in retail trading versus institutional investment. The self-described meme coin soared from $0.05 in late March to more than $0.40 by mid-April with a market capitalization of over $50 billion, according to CoinMarketCap, even as Bitcoin prices gave up ground.
Of course, these dynamics could shift if and when a Bitcoin exchange-traded fund hits the market. The Securities and Exchange Commission (SEC) is reviewing VanEck’s second proposal for a Bitcoin ETF and has two weeks to decide whether to approve, reject or extend the review window. Any ETF could attract significant long-term investor interest.
There’s also the risk that regulations could spur a downturn in Bitcoin and other cryptocurrencies, which could lead retail traders to seek opportunities in other markets, including both alt-coins or stocks through apps like Robinhood.
Retail Revival: What It Means For The Crypto Market
Retail traders tend to introduce greater volatility into financial markets given their propensity to buy and sell over short periods of time. With a preference for momentum-based strategies over value-based strategies, there’s also the potential for less accurate price discovery and potential bubbles in some corners of the market.
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On the other hand, institutional investors tend to create more stable markets by adding liquidity and holding positions over longer periods of time. The emergence of a Bitcoin ETF, for example, could help stabilize the market by enabling more long-term investors to add Bitcoin positions to their portfolios without buying and selling cryptocurrencies.
The increase in retail traders could lead to greater market volatility in the near-term. These dynamics have been obvious in the movement in Bitcoin just prior to the Coinbase listing, which reversed shortly after the IPO with a 15% decline—the largest correction since February. In the meantime, Dogecoin—a self-described meme coin—rose sharply higher.
Long-term crypto investors should consider leaving their long-term positions intact given the difficulty of timing the market. After all, the biggest cost of market timing is being out when the market unexpectedly moves higher, potentially missing some of the best-performing moments. These risks are particularly acute in highly volatile cryptocurrencies.
That said, it might make sense for long-term investors to adjust crypto positions as part of their rebalancing process. A significant run-up in Bitcoin prices could cause Bitcoin to account for too much of their portfolio, which may require them to sell Bitcoin and purchase other assets in order to maintain their ideal portfolio allocation.
Tax Implications to Keep in Mind
Long-term investors that decide to take money off the table should be aware of the tax consequences of those decisions. In particular, crypto positions sold after less than a year could trigger higher short-term capital gains tax rates equivalent to your ordinary income tax bracket—a much higher cost than the 15% to 20% long-term capital gain tax rate.
Greater volatility also creates an opportunity for long-term investors to harvest tax losses in a market that’s currently not governed by the Wash Sale Rule that impacts equities. If you purchase a crypto asset that falls in value during a period of volatility, you can sell that asset to realize the loss and immediately replace it in your portfolio.
ZenLedger automatically aggregates transactions across wallets and exchanges, computes the capital gain or loss and pre-populates IRS tax forms. In addition, the platform’s tax loss harvesting capabilities make it easy to find opportunities to reduce your tax burden throughout the year by realizing tax losses. Try it for free today!
The Bottom Line
Retail traders have taken a renewed interest in Bitcoin and other cryptocurrencies following the Coinbase initial public offering in the first quarter of 2021. While long-term investors should ignore these short-term movements, those that want to take profit off the table should be mindful of the tax implications of their purchases or sales.
If you’re struggling with your taxes, try ZenLedger today to automatically aggregate your transactions across wallets and exchanges and ensure you’re accurately reporting what you owe.