Institutions are overwhelmingly positive for Bitcoin and Crypto, but they do bring with them some baggage...

The holy grail for bitcoin has long been getting institutions involved on a wide scale, however, that does bring a different set of challenges as well.

Going back to 2017, the major development that was going to take bitcoin and crypto to the moon and beyond was the entrance of institutions.

The major development at the time was the entrance of the CME and their bitcoin futures products which were sure to create an avenue for institutional involvement.

While that ultimately proved to be true as the CME bitcoin product has been highly demanded and highly traded ever since it launched, it marked one of the only way institutions entered the crypto market for some years.

It wasn't until 2020 that institutions really made their way into crypto on a large scale to the degree we were hoping back in 2017.

Better late than never right?

Anyways, there are a number of positives that getting institutions involved brings, and I won't get into all of those here as most of them are probably pretty intuitive, but here is also some new challenges that they carry with them as well.

And one of those new challenges was very evident yesterday (Friday)...

Significant margin hikes caused the route in stocks and bitcoin

As you may or may not have been aware of, the stock market sold off rather steeply yesterday and that spilled over into bitcoin.

The reason for the decline in stocks and subsequent spill over had to do with margin hikes.

You see, many brokers hiked margin requirements yesterday, basically across the board, and this hike in margin requirements caused what is known as margin calls.

These margin calls required people on margin to either put up more cash to stay in their positions or sell the things they owned in violation of the new margin requirements.

This forced many funds to have to sell out of their holdings in order to meet these new margin requirements, and now that bitcoin is more institutionalized it was also one of their holdings they were likely forced to reduce exposure to.

The end result was a massive deleveraging where funds dumped stocks and bitcoin alike, which lucky for them happened right after a tweet from Elon Musk sent bitcoin soaring to $38k.

The spike in bitcoin gave them a perfect opportunity to unload some of bitcoin at a great price, and unload they did.

This is why bitcoin basically when straight back down after hitting $38k, mostly in lockstep with stocks selling off as well.

(Source: https://www.cnbc.com/2021/01/28/robinhood-interactive-brokers-restrict-trading-in-gamestop-s.html)

Why the margin hikes?

So, now that you understand why the margin hikes caused a sell off in stocks and bitcoin, it's important to understand why it happened.

The long and short of it is GameStop.

As you have likely heard by now there has been extreme volatility surrounding GameStop, AMC, Blackberry, and a handful of other heavily shorted stocks.

The volatility was caused by a group (WallStreetBets) targeting highly shorted stocks with the intent of causing massive short squeezes.

These squeezes caused massive losses to the hedge funds shorting them, one even having to get billions in additional capital to prevent going bankrupt.

This environment lead other hedge funds to reduce their exposure to shorts out of fear they could be squeezed as well. This reduction and subsequent volatility caused others to hike margin requirements due to the current volatile environment.

These hiked margin requirements caused even more volatility as it forced people to close positions perhaps they didn't plan on closing.

Add it all up and you have stocks selling off hard and bitcoin selling of as well.

The good news is that margin hikes are quite common and are usually just a few day event, meaning that the selling in stocks and bitcoin will likely be short lived.

Hope this helped give you an idea of the current investing environment in both the stock market as well as in bitcoin.

My personal view is that this was a short term one off event and bitcoin has already made it's lows during this pullback and will make new highs within the coming weeks and months.

Stay informed my friends.

-Doc