Q4 Cryptocurrency Institutional Developments Summary
Since July, Crypto prices have remained quite stagnant, market sentiment has remained mostly bearish, and prices seem to reflect this viewpoint. While prices have seemingly stayed about the same, There has been a massive influx of bullish developments in the crypto currency space. In early 2018 everyone was talking about how “institutional investors” are going to come into the space and change everything drastically. This has clearly not been the case so far this year. This does not mean cryptocurrency investment has not peaked the interest of larger firms. The problem is that institutions simply cannot dive headfirst into a mostly unregulated, highly illiquid asset class with only few trusted custody solutions. With that being said, over the second half of 2018 things are shaping up very nicely from an infrastructure perspective. Institutions move very slowly, especially when you are talking about a completely original asset class that carries high risk. No one wants to be the first, they want to be a close second.
What developments have we seen that are laying the groundwork for institutional involvement? To be honest, there have been so many developments it’s likely we don’t cover them all, but we have chosen what we believe are the most important updates in chronological order by month.
ICE, a commodity and futures clearing house owned by NYSE, created a product called Bakkt. Bakkt will execute Bitcoin futures as do CME and CBOE although Bakkt future’s will be settled in physical bitcoin, where as CME and CBOE are settled in cash. This is a huge development for crypto because not only does it further legitimize Bitcoin in the eyes of large institutions, it creates a real market demand for physical bitcoin. Bakkt exchange will be required to hold BTC as collateral for the futures. All of this leads to a potentially more stable and fair priced Bitcoin product. A key necessity for the future success of the flagship cryptocurrency. Bakkt exchange announced this past week that they will commence futures trading on December 12, 2018.
August was an interesting period for Bitcoin and we experienced some anticipated setbacks. In order for all of these financial products to actually be implemented, they require intense scrutiny from the SEC. The SEC has begun to warm up to the idea of cryptocurrency becoming mainstream, although we are far from any clear cut regulations. In August the SEC denied 9 ETF proposals, two of the most notable denial’s were The Winklevoss Twins’ ETF and VanEck and SolidX ETF. In their denial, the SEC cited issues with the size and scope of the cryptocurrency market, noting that it’s still too susceptible to manipulation for them to feel comfortable approving these large scale financial products. Critics of this decisions have argued that the SEC is being intentionally vague in their explanation for the denials, making it very difficult for the ETF’s to find clear cut answers on how they should be structured in order to be approved. In my opinion, the problems The SEC is citing in opposition to approving the ETF’s are the cause of the problem. If they don’t allow trusted firms to participate in the market in a formal and regulated way, then you can be sure that crypto will remain trading on unregulated exchanges away from the purview of the SEC and regulators, resulting in the manipulation we see today.
In September, we saw two major banks open up to the crypto world. In early September, Citigroup announced the launch of its Digital Asset Receipt (DAR), which in many ways resembles an ETF, in the sense that investors do need to “own” Bitcoin or other offered digital assets. Citigroup has seen success with these DAR’s in foreign markets that United States customers want in on. Citigroup, custodially owning Bitcoin in its reserves, will issue these DAR’s to its investors. These DAR’s will ensure the quality of these investments, in the sense that it will be fully regulated and insured by Citigroup bank. Around the same time in September, Morgan Stanley announced its plans to support bitcoin-trading swaps. At a date TBA, traders will be fully exposed to a derivatives market, where they have ability to “long” or “short” these price-return swaps. It is important to note that both of these announcements only give Bitcoin and other digital assets synthetic exposure vs real ownership exposure. The structure behind DAR’s and atomic-swapping gives fully insured and institutionally backed products to the investor and we cannot question the importance of this. But as an investor, you are not actually “owning” bitcoin, but rather purchasing a contract that synthetically “exposes” you to the performance of Bitcoin. Albeit launch dates are to be determined, and laggy development information, these announcements not only indicate increasing liquidity, but they indicate early institutional adoption, cooperation and most importantly transition into the digital asset class.
October has been by far the most bullish month in terms of long term infrastructure development for the crypto space as it pertains to institutional involvement. Primarily, Fidelity Investments, A brokerage firm with over 7.2 Trillion in assets under management and millions of retail clients, announced that it is launching a crypto custody solution. CEO Abigail Johnson stated: “Our goal is to make digitally-native assets, such as bitcoin, more accessible to investors”. While Fidelity is still in the early stages of developing and testing their new custody products, this continues the clear trend of institutional involvement and interest within the cryptocurrency space. Fidelity is a well trusted brokerage firm and their offering of a regulated and trusted custody solution could bring much larger players into the market. Another U.S brokerage giant, T.D Ameritrade, announced its involvement in cryptocurrency in October. T.D has 1.2 Trillion is assets and over 11 Million retail clients. Their move was initiated by an investment in ERIS x, a cryptocurrency exchange which will offer futures and spot trading for a variety of crypto assets. The CEO cited increased demand from its clients as a causation for this move: “We continue to see our retail clients seeking access to trade digital currency products”. In the not so distant future retail investors may have access to a wide array of crypto assets alongside their traditional equities portfolio. So far, even in the face of these bullish developments, Bitcoin has not seemed to budge.
This past week, Tether, a “stable coin” that is pegged to the US dollar, briefly lost its parity, dumping down to .82 cents. This sparked a widespread panic for investors who were holding large amounts of tether and many decided to offload their tether into BTC and other USDT pairs. Bitcoin price briefly spiked to $7600 but since has fully retraced that move. Uncertainty surrounding tether has sparked a race from existing large crypto firms to create their own, more reliable stablecoin. Two new stable coins that could offer great promise are Gemini’s new stable coin, the “Gemini Dollar”, and the Coinbase stable coin “USDC”. Both Gemini and Coinbase are U.S companies that are fully compliant to regulations. This will hopefully lead to a lot more transparency behind the stable coins, something that has been the achilles heel for Tether. Furthermore, the introduction of more trusted stablecoins into the market could provide better liquidity and stability into the markets, as well as increasing trust for current and potential investors.
Ultimately it all comes down to Regulations, Regulations, Regulations. For big money, crypto investing is infeasible without them. For cyberpunks and crypto anarchists, regulations and formal financial products surrounding bitcoin are the antithesis of cryptocurrency. But, reality points to a more reasonable and attainable path to making cryptocurrency use mainstream. It’s extremely unlikely that crypto can reach mainstream status if it continues down the of circumventing regulations. I believe there will be a happy medium between regulated and centralized exchanges and their decentralized counterparts. Afterall, If Bitcoin ever looks to achieve the goal of digital global reserve currency, then It will need to be highly liquid and much less volatile, aspects that are currently only achievable through the use of existing financial products.