Why Institutions Matter For Crypto

Some estimates suggest global institutional investors have more than US$130 trillion (yes, with a “T”) of assets under the management. Their entrance into crypto could mean a whole new era for the sector.

There’s been a lot of excitement about institutions entering crypto, and with headline-grabbing news such as Coinbase’s recent launch of a suite of institutional products, 2018 looks set to be a year of further influx of institutional capital.

At the start of the year, George Soros was still calling cryptocurrencies the ultimate bubble, but by April, the financier had given his USD 26 billion family office the green light to trade digital assets¹. That same month, the Rockefeller family announced a 2.6 billion USD venture capital arm “Venrock” will team up with CoinFund to invest in blockchain based startups². Then the May Coinbase news came and suddenly, after years of a wait-and-see stance, more and more institutional investors are buying crypto-assets.

It’s not difficult to understand why.

BURGEONING ASSET CLASS

The average daily exchange-traded volume across crypto assets is greater than USD 18 billion, with more than 200 active crypto-exchanges and hundreds of blockchain-based traded assets³. In the first half of 2018, ICOs raised USD 9.6 billion, more than double all of 2017 (USD 4.0 billion), including the giant 1.7 billion USD Telegram ICO Pre-Sale⁴.

A growing number of traditional industry stalwarts, from Kodak to Microsoft to IBM to Accenture, are also entering blockchain. And, at the same time, innovative and ambitious startups are surging within the crypto-space with real, disruptive blockchain use cases.

“HERE TO STAY”

This has set the scene for the crypto space to enter a new era — an era backed by an influential investor class: institutional money. What exactly defines an institution, however? Academic definitions of “institutional investor” differ depending on author and region, but an underlying principle emerges: institutions provide the vehicle for large numbers of people to enter a market, creating high demand in that market from investors⁵. Economist Richard Sylla has included institutions in his list of six features of successful financial revolutions. Institutional investors serve as a hallmark of modernity, and they are the way the financial system figuratively tells a new asset class: “you are here to stay.”

Global asset owners including pension funds, sovereign wealth funds, endowments and foundations, mutual funds and insurance funds control USD 131 trillion USD of global wealth, according to research by Willis Towers Watson⁶.

Of those, the assets under management of the hedge fund industry surpass USD 3.1 trillion USD, data provider Hedge Fund Research (HFR) estimates⁷.

That is a lot of money available to crypto, even if just a tiny slice moves in. And, according to Jim Kyung-Soo Liew, assistant professor at Johns Hopkins University Carey Business School, institutional investors are indeed under-allocated when it comes to crypto-assets. After making a bitcoin risk analysis, he concluded that an optimal portfolio for institutional investors consists of 48.82% equity, 49.88% bonds, and 1.30% BTC⁸.

COMING OF AGE

Beyond the potential benefits regarding funds available and liquidity, the institutional investors embracing crypto have a deeper and more endurable meaning right now: legitimization. It will boost trust, support, and competition, marking the coming of age for the whole industry.

That’s why the crypto-space has to be ready and do its part to leverage this opportunity, easing the many obstacles that still lie ahead with the necessary tools.

At Caspian, we welcome the trend and see ourselves as integral to supporting the increasing institutionalization of this asset class. With our full-stack crypto trading and risk management platform developed precisely for institutional investors and sophisticated crypto traders, we are well placed to further this movement.

We believe the crypto industry benefits when the pie gets bigger for everyone. And one of the surest ways for the industry to grow is by facilitating the institutionalization of crypto. You can see some of our key thinking on the topic here and here.

Sincerely,

The Team at Caspian

We’d love to hear from you. Please leave a comment or chat us up on Telegram. If you want to learn more about our platform, please visit us at caspian.tech.

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Caspian is a joint venture between Tora and Kenetic, who have successful track records in asset management and cryptocurrency investing. Tora is a leading supplier of asset management technology, including an OEMS that averages monthly notional equity volume exceeding US$100 billion and is currently responsible for 17% of Japanese institutional equity trading volume. Kenetic is a blockchain firm committed to expanding the development and adoption of blockchain platforms through investments, advisory services, community and technology.

References

1. Alastair Marsh, Saijel Kishan, Katherine Burton. George Soros Prepares to Trade Cryptocurrencies (Apr 6, 2018) Bloomberg: https://www.bloomberg.com/news/articles/2018-04-06/george-soros-prepares-to-trade-cryptocurrencies-as-prices-plunge
2. Robert Hackett. It Started With the Rockefellers. Now It’s Taking on Crypto (Apr 6, 2018) Fortune: http://fortune.com/2018/04/06/crypto-vc-venrock-coinfund/
3. (May 25, 2018) Coinmarketcap.com/Charts https://coinmarketcap.com/charts/
4. (Jun 04, 2018) Total Number of ICOS: 396 Total raised: $9,599,861,294 https://www.coinschedule.com/stats.html
5. Gelderblom, O., & Jonker, J. (2009). With a view to hold: The emergence of institutional investors on the Amsterdam securities market during the seventeenth and eighteenth centuries. In J. Atack & L. Neal (Eds.), The Origins and Development of Financial Markets and Institutions: From the Seventeenth Century to the Present (pp. 71–98). Cambridge: Cambridge University Press. doi:10.1017/CBO9780511757419.004 “We may summarize the importance of institutional investors as, on the one hand, providing access to the securities market for savers otherwise unable to enter it, and on the other hand as providing a ready demand for secure investments suited to fund long-term liabilities”
6. Willis Towers Watson. Global pension assets study 2018 (February 2018) https://www.willistowerswatson.com/-/media/WTW/Images/Press/2018/01/Global-Pension-Asset-Study-2018-Japan.pdf
7. Hedge Fund Research Global Report (April 2018) https://www.hedgefundresearch.com/reports/hfr-global-hedge-fund-industry-report
8. Liew, Jim Kyung-Soo and Hewlett, Levar, The Case for Bitcoin for Institutional Investors: Bubble Investing or Fundamentally Sound? (December 5, 2017). Available at SSRN: https://ssrn.com/abstract=3082808 or http://dx.doi.org/10.2139/ssrn.3082808