Are retail investors the key to digital assets trading taking off?

Download the book

Are institutional investors looking for a higher level of regulatory certainty before they invest in digital assets?

Institutional investors care primarily about their investments, the speed with which they can be executed, the transparency of information about them and how safely they are kept. So, for them, a sound regulatory environment is a requirement that must be met before they will invest.

Have institutional investors embraced cryptocurrencies?

In 2025 cryptocurrencies make up the same proportion of the investable asset universe (1.5 per cent) as they did in 2022, when the FTX cryptocurrency exchange failed, and the market capitalisation of the cryptocurrency market plunged. So the value of cryptocurrencies relative to conventional assets has remained steady through severe market fluctuations. It follows that any institutional investor wanting to maintain a market-neutral position ought therefore to allocate 1.5 per cent of their portfolio to cryptocurrencies. The decision by the Securities and Exchange Commission (SEC) in January 2024 to permit Exchange Traded Funds (ETFs) to invest in spot Bitcoin has furnished institutional investors with a safe, transparent, regulated physically backed vehicle to acquire the necessary cryptocurrency exposure. In 2024 spot Bitcoin ETFs attracted US$129 billion in inflow from institutional as well as retail interest, making them the best performing ETFs in terms of assets under management during the year.

Are digital assets following the same path of development as other novel asset classes in the past?

Digital assets are available now because the computing power that makes them possible is available now. This was the same factor that spurred the explosive growth of the OTC derivative markets across equity, credit, currencies, commodities and other asset classes from the 1980s onwards. In other words, digital assets are on an unstoppable path because they are an aspect of underlying technological progress.

What does the experience of cryptocurrency exchanges in selling wrapped versions of blue-chip stocks prove about retail appetite for tokenised securities?

Wrapped token versions of existing stocks were a development that built on wrapped cryptocurrency tokens. For example, tokenised versions of Gamestop, Google, Microsoft, NVIDIA and Tesla trade on INX.  The option is valuable, in that tokenised versions of the securities allow round-the-clock trading in full compliance with securities laws. But transaction volumes do not match those on traditional exchanges, even though newly launched cryptocurrencies have attracted substantial retail interest and put large amounts of retail capital on-chain. Indeed, what will determine the success of tokenisation is its ability to make use of the retail capital now residing on-chain. That in turn depends on its integration with Decentralised Finance (DeFi) applications, which would enable holders to profit from lending or investing in on-chain assets, or from leveraging positions by borrowing against them as collateral, without the help of intermediaries. This is as true of tokenised blue-chip stocks as it is of cryptocurrencies. Such integration is not theoretical or futuristic. Cryptocurrency and token exchanges and trading platforms incorporate un-intermediated collateralised lending and borrowing functionalities for retail investors already. They include self-operating margin calls operated by smart contracts. The same smart contracts also sell inadequately collateralised positions automatically. These tools are expected to be available to institutional as well as retail investors within five to ten years.

Have traditional exchanges focused on institutional business at the expense of retail business?

Even in the traditional securities markets, established exchanges have ceded retail relationships to alternative platforms and retail brokerage firms such as Charles Schwab, Fidelity and Robinhood because the alternatives offer margin lending and access to listed securities in exchange for minimal transaction fees. The success of firms such as eToro in the cryptocurrency markets suggests the pattern is repeating itself there. For traditional exchanges, this indifference to retail investors is short-sighted, for several reasons. First, the technology underpinning retail investment is changing fundamentally, from broker-intermediated transactions on domestic exchanges within fixed trading hours to settlement timetables measured in days, to instant-settlement, peer-to-peer trading apps based on open-source software and distributed databases accessible round-the-clock by anyone with a smartphone. Secondly, it is retail investors, not their institutional counterparts, that pioneered the cryptocurrency markets – in large part because the gains, unlike conventional securities, were not taxed - and will likely do the same in security token markets. Thirdly, the rising generation of younger retail investors – the beneficiaries of a wealth transfer from Baby Boomers that McKinsey estimates at US$84 trillion - are more comfortable investing in digital assets via digital devices than in buying conventional securities or funds. Fourthly, as the Gamestop short squeeze of January 2021 proved, retail investors can overwhelm institutional money when sufficiently motivated, because social media makes it relatively easy to create a “swarm.” Fifthly, retail investors have a larger appetite for small and mid-cap stocks than institutional investors, which adds breadth and depth to transaction volumes. Sixthly, fractionalisation makes it possible for retail investors to buy tokenised equities, bonds and funds in sizes far below the minimum subscriptions of institutional investors. So it would be prudent for traditional exchanges to extend trading hours, reduce trading sizes and offer retail investors trading apps and educational materials comparable to those provided today by cryptocurrency exchanges and trading platforms. As they do so, traditional exchanges can call on a marketing advantage start-up exchanges do not have: public trust, earned from looking after institutional money for decades. Significantly, Nasdaq announced in March 2025 it was talking to regulators about enabling trading 24/7 five days a week, as a response to increased retail engagement with Nasdaq stock market.

How will retail and institutional investors interact in tokenised markets?

The distinction between retail and institutional money is somewhat bogus. Major asset managers that issue funds that gather retail money to invest in spot Bitcoin, for example, are institutions following a retail lead.  Retail investors are also pioneering security tokens, partly because, so far, the issuers of security tokens are a case of adverse selection akin to crowdfunding: the company issues tokens because it could not raise capital from institutional investors. This will change as the token markets mature, and institutions are attracted by the rising quality of the issuers. Besides, retail investors are not just pioneers. They are also followers. Retail investors have always observed which securities institutions are buying and selling, because they can piggy-back on the research capabilities institutions command. In fact, studies of conventional securities markets show that retail money follows institutional money, certainly in benchmark products. This pattern is likely to recur in the case of digitally native securities tokens. Trading platforms and apps will emerge to service retail investors that follow an institutional lead into the new asset class.

What advantage do tokens offer retail investors over spread betting and contracts for differences (CFDs)?

Retail investors in developed markets can open accounts with discount brokerage firms and retail trading platforms and trade around the clock on a smartphone a personal portfolio of equities, commodities, bonds and other financial assets without having to master the intricacies of clearing, settlement and custody. However, not all retail investors are comfortable running their own spread betting and CFD account. Nor are such services available in all markets around the world. In addition, the technological infrastructure is not yet in place on a sufficient scale to enable tokens to compete with existing retail investment services. Furthermore, regulators in many jurisdictions prevent tokens competing because retail investors are not allowed to purchase tokens or even access the Ethereum blockchain (which hosts almost all tokens). Once they are, the younger generations of investors that are comfortable trading cryptocurrencies on their smartphones will adapt to buying tokens more readily than opening a spread betting and CFDs account. Older and more experienced retail investors with more money to invest are less likely to switch to token offerings. Lastly, conventional accounts with conventional firms ultimately offer access to conventional securities using conventional money only. Blockchain networks, on the other hand, also host assets not obtainable elsewhere and, through Stablecoins, enable investors to hold and use cash on-chain instead of needing a bank account.

Do tokens make commercial sense for digital asset exchanges?

Benefits of tokenisation, such as fractionalisation, make sense for investors with limited savings. They can also make sense for issuers, who might put a high value on broadening their investor base even if the transaction costs of doing so appear excessive to others. For exchanges, the attraction is harder to discern. Exchanges trading, say, tokenised equities in small lots might struggle to survive on the spreads and transaction fees small trades generate, especially if their cost base and business model are unchanged. But if an exchange builds a blockchain infrastructure, the cost efficiencies might enable it to host trades in smaller lots profitably. In other words, transactions that are unprofitable under the present cost structure ought to become commercially viable in a tokenised future and, by enlarging the number of customers that can be serviced profitably, substitute volume for value. Institutions are also likely to emerge (or evolve) that can aggregate retail business into larger lots. Firms that want to attract retail investors should not treat institutions as irrelevant to that ambition.

Is there a risk that a spectacular cryptocurrency bust leads to the disillusionment of an entire generation of retail investors drawn into the market by the success of Bitcoin? 

A conventional solution - diversification - is the obvious answer to that risk. After all, there are good reasons not to hold fiat currencies such as the US dollar as well as good reasons not to hold Bitcoin. What is reassuring about Bitcoin is that it is part of a wider technological transition and money will likely to need to change to keep pace with it. The technological shift is the next iteration of the Internet and, whatever else Bitcoin has achieved, it has proved consumers can transmit value over the Internet without the intermediation of banks. This is a genuine technical innovation and an undeniable technological breakthrough. However, the endorsement of the present generation of cryptocurrencies by the Trump administration, and the possibility of central banks adding Bitcoin to their currency reserves, represent departures from the founding principles of Bitcoin.