The wave of institutional money waiting to enter crypto and what might really happen

Source: monthly-finance.com

If you have read my previous articles, you’ll already suspect that I am being sarcastic in the heading. Sorry, yes I am. I’ll also apologize beforehand for a slightly ‘opinionated’ piece here.

I am writing this article not as a new point, because currently, despite the fast pace of crypto trading, there are no new points to make, but as a reminder. You can read here (November 2017), here (March 2018) and here (May 2018) why the entire crypto space is a massive bubble and here how you are being taken advantage of. Finally, you can read here (for example) that I am not just some permabear, I actually have been very Bullish before.

By the way, the fact we are in a bubble is not up for debate anymore. The inflation and deflation of this bubble has followed the .com bubble almost perfectly, both in content (ICO/IPO boom, etc) as well as in price movements (from blow off top to bear market rallies). The cat is out of the bag.

I am saddened by the inactivity of regulators globally as well as the naiveté of first time investors everywhere, which is why I am writing these pieces. So here is what you do not want to hear.

There is no money aching to get into crypto — the curious case of the elusive ETF

There is a lingering belief amongst the cryptosphere that all we will need is an ETF on bitcoin to unlock massive amounts of money that are just aching to come into crypto. Popular commentators with hidden agendas or subconscious biases STILL lie almost weekly about “massive otc demand” and how stupid you are for not “buying the dip” (may I suggest “buying the crater” from now on?) in every altcoin you see with a good “TA”, “PA” or based on some “fractal”. Crypto has developed a sub culture that could be considered entertaining if it did not lure unsuspecting first time investors into betting their life savings on hot air.

But back to my point. Institutional investors, aka the guys who will push crypto to the moon, are the most sophisticated investors we have. Yes, they can be spectacularly wrong, but historically they tend to be more right than wrong, especially vis-a-vis the average Joe who hears the news last. There are a few of them who realized bitcoin’s potential very early on and those have been handsomely rewarded. As for the rest, if they want to they can buy an exchange traded note on bitcoin (it has been listed for almost a year), a listed investment trust, a future (ya know, the things they mostly use to speculate on Oil or, say gold), one of countless (useless) crypto hedge funds (as indeed it seems many have already done LONG ago) or use their brainpower and their resources to self-custody bitcoin. Will an ETF make all that much easier? Yes! Will it mean that people automatically want to invest their investors’ money into it? Hell no. For the record: there is hardly any way for institutions to currently short bitcoin aside from futures unless they can stomach a bitmex account, but that’s just noted in passing.

The point I am trying to make here is that those institutions who have a fundamental view on bitcoin that is Bullish have long (long!) ago bought their bitcoin. The rest is very much the same as you — they will buy only in Fear of Missing Out (FOMO). That also goes for private investors not technically sophisticated enough to have bought bitcoin before.

The thing is, while bitcoin sits somewhere between $5k and $10k none of them will experience any FOMO. Good biotech funds regularly yield 20-30% in profits, as do emerging markets funds, some private equity investments or niche hedge fund strategies. Not every year obviously, but with a reasonable-enough frequency that making 30% or even 50% on an asset with a volatility that is off the charts (crypto) is not appealing enough for them to consider it a better bet. Also, in almost all of these classic investments you get rewarded for doing good work — there is an actual asset to value and you can be better at understanding a company’s drug pipeline or its likelihood to go bust than other people. You do not need to rely on the greater fool’s theory to make a case for your investment. Or, to put it differently, even internet companies in 2001 had revenues and equity as well as debt holders have a legally defendable claim to those revenues. I don’t want to repeat too much from my article on ICOs, so I will stop here, but if you don’t get that this is a colossal issue with any ICO token you look at, please go back and read it.

So there is no reason whatsoever for the institutional investor not already invested in bitcoin to get involved in it or much less other cryptos just because there is an ETF. They have no FOMO and they see no fundamental value in an ICO without any rights or a currency that they do not need. These guys tend to be the ones that trust banks, use the US Dollar or the Euro easily and can send 10s of millions of Dollars around the globe to another account in a few minutes. They do not need bitcoin and do not see the value proposition without having FOMO (ie the objective to make more Dollars, which is kind of against the point of it).

Furthermore, given the obvious price manipulations by one party (tether), there is really very little reason to believe crypto markets are ready to cater to institutions. They will want to be the manipulators, not the manipulatees in such a market. Of course, there is a point to be made that the ETF could have a chance to finally shake bitcoin lose from tethers hands. In any case, the cluster risk of tether is just too huge for institutions to not be weary.

FOMO trumps everything, but in its absence, buyers actually beware.

So what does this mean?

The ETF decision by the SEC therefore will likely prove to be a classic buy the rumor, sell the news situation (just like the big boost Consensus 2018 gave to crypto prices…). In other words: if the expectation is that the SEC will grant an ETF license, then the news that it has actually received green light will cause the price of bitcoin to pump briefly and then fade (in case of a negative market expectation it will pump more, but still fade), likely to a level lower than where it started from. After all, once the ETF is there, there will be nothing to look forward to (though I can see the launch of that ETF being played up by the usual suspects as the next big thing, so maybe that is the final step). When the “wave” of institutional money then fails to materialize, people will sooner or later dump their holdings. The only question is how quickly you join them. Hint: it is already quite late, but as I said countless times, never forget that the asset that drops 90% is the one that first dropped 80% and halves in value from there (for everyone who is still holding at that point). Crypto is currently worth $240bn-for mostly hot air. There is a time to say bitcoin is too cheap, but I doubt it will be while we are still in the $100s of billions in market cap for all of crypto (and that figure omits all the token of useless ICOs still held by founders not counted by most sites). Of course, we all know I can be wrong, but then there will be ample time to realize this should prices only ever rise again. This is also not advice. By the way, should the ETF decision be negative I would expect a short drop in price that will be bought. In that case hopium lives on.

Mass tokenization-to the moon

It is funny how the large parts of the cryptosphere hail the coming of “mass tokenization” of all assets when they talk about future altcoin prices. Just know that these people are either too inexperienced (dare I say ‘simple’) to understand what that means or they have an ulterior motive in dumping their bags onto you.

Tokenization of financial and other assets may very well happen. Only it most certainly will not happen in a space devoid of regulation, nor will the tokenized piece of art you buy, the parts of a house you trade on the blockchain or indeed the equity we will be trading on it have any value whatsoever without a legally enforceable framework to support it. Tokenization lives and dies with the legal support layer. A contract is the same as a token — if it isn’t legally enforceable, utlimately by the state wielding stronger force than almost all individual actors and by the threat of prison or injury, it is worth nothing. Just because it may or may not make sense to trade assets on a blockchain, it does not follow that the current generation of token will be worth anything once that happens in the absence of clearly enforceable rights.

Bitcoin is the most secure decentralized blockchain, so there might be some people who would prefer to write their contracts on that chain. It is also entirely plausible that some people might want to tokenize their company’s equity on a scalable version of the Ethereum blockchain as a token. However, the token are completely meaningless without legal backing. Also, nobody needs a specific token to do this (wasn’t Polymath a brilliant scam that really played on your imagination?). So here is what will likely happen if the blockchain proves superior (which it may well do):

The banks that we all want to buy our crypto but at the same time pretend to hate dearly as well as quite possibly some larger non-banks like Apple, Amazon, Microsoft, Facebook or Google have every incentive to build a semi-centralized blockchain that is run on their servers. There are no miners in the classic sense as these institutions are more than well incentivized to sacrifice the computing power at that point. This blockchain has several advantages over any “rogue” blockchain such as bitcoin.

  • It is decentralized enough for it to be secure (enough). You may have hackers invade one bank or one of the above firms at a time, but for them to infiltrate a majority of the computing power in all of them? Well, let’s just say even most regional banks’ online banking manages to be half-way secure
  • There is a legal backstop. Assets or currencies that trade on this chain are legally enforceable titles. Can this be achieved on a completely decentralized chain? In theory yes, but the nature of our system makes the above solution too “plug and play” not to win out.
  • Someone will be responsible for your stupidity. Face it — people are stupid. How wonderful then that when something goes wrong on this blockchain, there will be a way to fix it. If you send money to the wrong account you can get it back, if you sent part of your house, even more urgency. When companies go bankrupt because of errors like that there will be a party to sue (the banks running the chain).
  • The infrastructure is already there. Institutions trust banks. People trust companies like Apple or Facebook. Literally every day. And all those firms have capital to make sure they can pay in case of a legal liability.
  • Efficiency gains will be enormous. One of the biggest tail risks to the financial system are clearing houses. These ensure that the seller of an assets gets the money and the buyer gets the asset, like a share. Because they need to verify both sides of a trade, trade “settlement” generally takes at least a day, sometimes even five days. To insure against losses, there are membership fees paid by every market participant. Banks will be able to rid themselves of a huge tail risk, a cost block and make things more efficient. A dream come true.

So this is more or less what I would see happening in terms of asset tokenization. As I said countless times, your ICO token has one basic chance to not go to zero: if the founders are wise/fair enough to convert it into direct equity ownership in their businesses. Whether they will do this after receiving so much money for hot air and risking legal headaches by doing it remains a big question mark. But I addressed the value of ICOs before.

As for bitcoin I believe it has a role to play in this new tokenized world. For that role to be considerably larger than today though, it needs a killer app. A usecase that we all use daily, at least aside from the obvious appeal to anonymity (after mixing) or money laundering. Alternatively it could benefit from the whole world turning into Venezuela (I do hope you join me in hoping that does not happen) or from becoming a low volatility store of value. It is not today. Of course, tether is likely to put up a fight and cause FOMO to push the price to new highs and it might even succeed. But under normal market conditions, there is simply no reason to FOMO head over heels into an asset that is highly manipulated, volatile and quite possibly not even as decentralized as you might think (Chinese miners 51%?).

Please, do not get me wrong — I am not against bitcoin, I am not even particularly negative on blockchain or crypto. I am merely stating my opinion and I am for a legally enforceable, meritocratic (as much as that is possible) system that rewards activity and not sitting on your butt watching your money appreciate in value (looked at in another form of money). The current one has its flaws, but the solution currently suggested by bitcoin evangelists is not it in my opinion. We need a solution embeded in a legal and regulated framework in my opinion. We should not keep fighting regulation or hope that token are judged not to be securities. Once they become securities is when it becomes interesting.

Despite the heavy dose of what I’d call reality and all the opinion, if you enjoyed reading, please clap and if you like, follow me on twitter. Thanks for reading.

Lastly, the all important disclaimer: this is my personal opinion, not my professional advice. Most of all this is not investment advice in any way. Crypto assets can fluctuate widely in value and all of your capital can be lost. I have a 50/50 chance of being right and I absolutely recognize I can be wrong. Any negative views expressed are solely aimed at the token in question, never at the development teams behind them for which I have utmost respect (if they are sincere).