The Evolution of the Crypto Retail Market

The last cryptocurrency bull run was heavily influenced by retail investors, who contributed to the surge in prices and enthusiasm for digital assets. Many individuals were introduced to crypto for the first time during the 2021 and 2022 COVID lockdowns, and crypto companies actively sought to generate interest among the general public. This led to a flurry of Super Bowl ads, celebrity endorsements, and stadium sponsorship deals. However, the subsequent market crash marked a shift towards institution-led growth, with a focus on ETFs and the gradual adoption of traditional financial instruments. Despite this, retail investors have yet to return in large numbers, with the exception of memecoins. An analysis of market data from the previous year reveals key insights into the retail-institutional divide and the changing behavior of retail investors. The retail sector can be broadly categorized into two groups: 'shrimps' who hold less than one bitcoin, and 'crabs' who hold between one and ten bitcoins. In the latter half of 2017, bitcoin's price skyrocketed from $2,000 to $20,000, with hundreds of thousands of bitcoins being accumulated by retail investors, driving the price upward as crypto gained mainstream media attention. Following a prolonged bear market in 2018 and 2019, bitcoin's price surged again in late 2020 and early 2021, rising from approximately $10,000 to $60,000. However, this cohort was selling bitcoin throughout the period, having previously accumulated it during the bear market. The collapses of Luna and FTX in 2022 saw retail investors demonstrate their growing intelligence, accumulation of bitcoin reaching record highs. In June 2022, they accumulated over 300,000 bitcoins, and during the FTX collapse, this figure exceeded 525,000 bitcoins. Even at the March 2024 peak, they were selling into the bull market. A key takeaway is that retail investors have evolved into 'smart money,' adopting a dollar-cost averaging approach and consistently increasing their holdings with minimal sell-side pressure. This behavior is reminiscent of ETF buyers or passive investors who regularly purchase index funds. The iShares Bitcoin Trust ETF, which has seen $21.5 billion in net inflows since its launch, has experienced only three trading days of net outflows, a notable feat given bitcoin's volatility. The ETF cohort has weathered multiple bull market corrections, remaining unfazed and continuing to buy. The average purchase price of ETF investors is around $58,000, resulting in an 8% return on investment. Another significant development is the decrease in liquidations, which were prevalent in 2021 when government cash stimulus and lockdowns coincided with peak retail mania. The use of crypto-margin in futures trading has declined, with the majority of margin trading now being cash-based, reducing the risk of liquidations. Over the past couple of years, retail investors have become more sophisticated in their approach to investing in bitcoin, exhibiting similarities with ETF buyers. As the bitcoin market continues to evolve, the next step is likely to be the introduction of an options market for ETFs, which will attract a new wave of sophisticated investors and further enhance retail intelligence.