Institutional Money Is Pouring Into The Crypto Market And Its Only Going To Grow
In the formative years of bitcoin, it was dismissed by institutions as a showy worthless digital asset favored by criminals. Gradually the tectonic plates that shape sentiment in the corridors of power shifted. Bitcoin appeared to be on an ideological collision course with institutions in is first decade of existence recently bears the hallmark of institutional acceptance.
This has been driven by a number of factors led by the outstanding performance of bitcoin relative to any other asset class on the planet. ‘Smart money’ is allocating to bitcoin as a portfolio diversification strategy. These days family offices, hedge funds, and traditional money managers have a very different perspective on cryptocurrency products and services, with an eye-watering $17 billion worth of institutional capital flooding into the space this year alone.
Periodic surveys bear this out, with a growing number of institutional investors allocating a percentage of their portfolios to digital assets. A recent study conducted by Fidelity Digital Assets found that seven in ten institutional investors expect to buy or invest in cryptoassets in the near future. More than half of the 1,100 respondents surveyed between December and April revealed that they already own such investments.
A separate survey by Nickel Digital Asset Management came to a similar conclusion, with 82 percent of respondents expecting to increase their crypto allocation in the next two years. Just over a third of respondents said the involvement of more leading corporates and fund managers has given them greater confidence to invest.
BlackRock Leads the Way
When BlackRock adds crypto to its balance sheet, financial advisors and high net worth individuals naturally prick up their ears. BlackRock, the world’s largest asset manager with $9.5 trillion assets under management, is one of 16 mutual fund managers (including Morgan Stanley Investment Management) to gain exposure to the crypto market via its Global Allocation and Strategic Income Opportunities funds, which have a collective worth of over $40 billion.
BlackRock is also indirectly exposed to bitcoin via a 14.56 percent stake in MicroStrategy, the cloud software firm with over $3.4 billion of BTC on its balance sheet. MicroStrategy’s outspoken founder Michael Saylor has been one of bitcoin’s biggest champions in recent years arguing that it will soon be on the balance sheets of cities, states, governments, companies, small and big investors as well as core to tech innovation at Apple, Amazon, and Facebook.
Whether or not you agree with Saylor his leadership on the topic is clear to see – bitcoin maximalists have adopted Saylor as one of their own.
The term unicorn, reserved for privately-owned startups that reach a valuation exceeding $1 billion, increasingly applies to crypto companies, from Coinbase and Bitpanda to blockchain.com and fintech forensics giant Chainalysis. CoinDCX just became the first Indian crypto startup to achieve unicorn status following a $90 million funding round.
Coinbase is one of the crypto industry’s great success stories, and after its direct listing on Nasda this past spring the San Francisco-based exchange briefly achieved a valuation of $100 billion. Despite recent market choppiness, Coinbase surpassed all expectations in Q2, generating $2.23 billion of revenue – around $450 million more than expected. Monthly transacting users were also up 44 percent from Q1, hitting 8.8 million.
Crypto Investment Opportunities Abound
In recent years, a range of options has become available to those who are interested in crypto’s upside potential. Grayscale’s Bitcoin Trust, for example, allows investors to speculate on Bitcoin without needing to buy it directly. The fund is currently valued at well over $20 billion, and the asset manager has additional index funds dedicated to several altcoins such as Filecoin, Basic Attention Token, and Chainlink.
Elsewhere, crypto-dedicated investors trade derivatives on the leading exchanges or participate in the booming decentralized finance (DeFi) space, principally through staking, lending and borrowing with over $70 billion in Total Value Locked in the DeFi ecosystem.
Equity-type investments are currently setting records. This year, 10 of the 12 largest financing rounds in crypto were completed, raising just under $3.9 billion. One startup, the derivatives exchange FTX, managed to raise $900 million to achieve a cool valuation of $18 billion. The question many outside observers ask is ‘why now?’.
Xinshu Dong, a partner at venture capital fund IOSG Ventures says, “Many see the crypto market as the one with the most growth potential, justified by a much more frictionless and transparent way of business.
“VCs bet on high-risk, high-return investments and are typically unfazed by short-term volatility as long as the fundamentals remain promising. At the moment we’re seeing less people trying to discern whether market conditions are bullish or bearish; rather, the future of blockchain-powered technologies and applications just looks very bullish overall, despite the regulatory risks.”
Dong is keen to underscore crypto’s distinct advantages when compared to the traditional investment space adding, “With traditional VCs, fund returns are defined by the power law curve. Crypto is an interesting case where this has not set in yet, and this is due to multiple factors like the ability to mint tokens, liquidity mining, and overall greater arbitrage opportunities compared to traditional markets.”
Ben Middleton, an advisor at Ascensive Asset Management, believes Fear of Missing Out (FOMO) deserves some of the credit for the recent growth in equity-based investments, wherein blockchain firms raise capital through predominantly crypto-focused hedge funds.
Says Middleton, “VCs that invested in projects over the last few years earned outsized returns, so there’s definitely an element of FOMO for all investors in the space. Off the back of this, VCs have raised new funds or their existing funds have grown a lot in AUM, so there’s plenty of capital to deploy and some are actually forced to deploy it given their structure and lifecycle.
“On the Solana blockchain, to give one example, we’ve seen ten different money markets launching over the past two months. This all ends up with rounds being highly competitive and getting bid up. We think some VCs are even using a strategy of overpaying in rounds to price out their competitors and secure deals. They hope to build a reputation off the success of those projects, but also gain clout for being the go-to VC for all the major rounds.”
Whatever the reason, VC investments in crypto during the first six months of this year have more than doubled those witnessed in all previous years combined. Bitcoin’s April surge to a record high above $64,000 certainly helped, with number two crypto ETH achieving its own ATH a month later. Around this time, the global market value of all cryptocurrencies in circulation hit $2.5 trillion for the first time.
Profiting in a Pandemic
China’s mining crackdown and regulatory uncertainty around the world may cause investors to pause to consider cryptocurrency. Just last week, US Securities and Exchange Commission (SEC) chairman Gary Gensler described digital assets as ‘rife with fraud, scams, and abuse in certain applications’ and called for greater government regulation to protect (retail) investors.
If the long-touted physically-backed bitcoin ETF finally gets the regulatory green-light in the U.S., this could go some way to offering retail clients access to the performance of bitcoin in a safe, secure, and in some instances, risk-adjusted manner, and overcome issues the regulator raises that are currently barriers to mass retail access to and adoption of cryptocurrency.
PwC’s latest Global Crypto Hedge Fund Report reflects the consequent doubt, suggesting that regulatory uncertainty remains the greatest impediment for investors. Despite unanswered questions, the report asserts the growing number of funds is likely to increase competitive pressures between managers.
Many in the cryptocurrency community have been asking for years when the institutions are coming. The answer is now – the institutions have arrived, and this year has set the benchmark for institutional interest in cryptocurrencies. This is an important milestone to note.
The pace of innovation to replace the legacy plumbing in the institutional financial services infrastructure is significantly influenced by crypto and digital assets and blockchain and DLT infrastructure. The next decade of digital financial market infrastructure (dFMI) development and standards for brokerage, custody and settlement might just surprise many institutional pundits on the periphery of crypto and digital assets – Institutions have seen the future and further along the road to delivering it than most would think.