7 Thoughts Following Our Conference Call “When Will Institutional Investors Join The Bitcoin Party?”
On October 14th, we held a conference call with four thought leaders regarding institutional investor participation in bitcoin:
Matthew Walsh, Co-Founder and General Partner Of Boston Based Castle Island Ventures — an early stage venture fund focused exclusively on the blockchain /crypto asset sector.
Matthew Le Merle, Co-Founder and Managing Partner of S.F. based Blockchain Coinvestors — the world’s leading blockchain venture fund of funds.
Eli Mizroch, CEO & Co-Founder of Tel Aviv based Silver Castle Digital Currency Investment Group—an institutional grade asset management and investment house for digital currencies.
Travis Kling, Founder and Chief Investment Officer of Ikigai Asset Management—a long/short multi-strategy crypto asset hedge fund.
You can watch the presentations:
Or you can save some time and read our seven highlights from the call:
#1 This Is The First True Financial Innovation In Decades, And Everyone Will Want In On This New Asset Class
Eli Mizroch believes that tokens that are divisible and programmable via smart contracts will be compelling to every asset manager over time. As the economics get more understandable, the market gets to a meaningful scale, and client interest grows, institutions will come. Eli predicts we’ll start seeing meaningful institutioanl participation starting late 2020 or early 2021.
#2 Institutional Capital Requires A Thesis
While Bitcoin is seen as different things by different people, Matthew Walsh stated that there are two main thesis for institutional investors. The first thesis is “money first”, or money that is not controlled by the state. Previously, state and money had always been inextricably intertwined. This thesis is attractive because it’s a big market if you can take share from gold ($7 trillion) and/or offshore banking ($20-$30 trillion).
The second view is “tech first”, that crypto is fundamentally re-architecting the internet itself by creating products and services without platform lock in. This will reduce the role of data monopolies like Google, Facebook, Amazon, and others. “Tech first is also going after a massive addressable market.
#3 Institutional Investors Need Three Key Infrastructure Categories To Mature
The first need is qualified custody. While this is being solved by the likes of Fidelity and others, there is still a lack of clarity from the SEC of a good control location. Can a broker dealer hold a digital asset? How does bitcoin fit in to those parameters? Institutions need those issues clarified.
The 2nd need is regulated spot venues and futures exchanges, which are emerging. While Binance and Coinbase provide robust and easy to use exchanges, they are not investment grade in terms of regulations and functionality (e.g. combined order book, algorithmic trading, data generation…). What is also needed is mature settlement processes and surveillance sharing agreements between spot market venues. Matt Walsh believes a bitcoin ETF is unlikely until the surveillance issues are addressed.
The third need is robust data providers at institutional scale that are able to quote reference rates for digital assets, allowing institutions to mark to market. This is the area that is farthest along.
An interesting need that Travis Kling pointed out was the involvement of consultants like Cambridge Associates that can help educate institutional investors on the reasons to invest in crypto, thus alleviating some of the career risk asset managers face when recommending the volatile young asset.
#4 Crypto Markets Will Be Like Other Tech Markets Where One Winner Take Most of The Market
Google has more than 90% share of search. Apple captures 87% of all profits in the smart phone market. Amazon has 49% share of U.S. e-commerce. Matthew Le Merle believes most crypto markets will also be winner take most, so the VC game in crypto is all about getting a diverse portfolio and capturing the most winners. Interestingly, the first Blockchain Coinvestor fund-of-funds invested in six of the nine crypto (equity) unicorns:
#5 Digital Reserve Currency Is Coming, And That’s Great For Crypto/Bitcoin
In the U.S., teams at the Federal Reserve are working on a digital dollar. Mark Carney of the Bank of England has said the world would benefit from a digital reserve currency, and that it should include a basket of currencies. China’s digital Yuan is coming next year. Once these digital currencies appear, institutions will have no choice but to trade those digital assets. Given this sea change, 2020 will be the year that institutions prepare for a world of digital traded assets.
#6 It’s Early, But A Number of Institutions Are Already In The Market
While it’s a small percentage of the total institutional market, Travis said they’re seeing growing institutional interest and investment. While Bakkt got off to a slow start, it will help over time. Coupled with the entry of Fidelity custodying bitcoin, Travis believes we’ll look back at this period of time and see it as the start of a new chapter, the scaling of institutional participation.
Pomp’s meme of “Get Off Zero” is also helping, getting traction with both high net worth individuals as well as pensions and endowments. But they’re struggling how to get off zero. Do they buy bitcoin? Do they buy an index fund? What about a liquid focused hedge fund or a VC fund? The situation is exacerbated by the speed at which the crypto landscape is moving. The tribalism is also not helping. And the asset class has narrowed as bitcoin dominance has grown.
It often begins with institutional investors investing investing personally. It’s often a younger person that’s driving the institutional interest.
The FOMO is greater on the retail side, where RIAs are being asked by their clients about bitcoin. But it will come to institutions as well.
#7 The Macro Backdrop Is Stunningly Positive For Bitcoin,
Travis highlighted how we’re ten years in to the largest monetary experiment in human history. Ten years in to quantitative easing while running larger deficits on top of increasingly untenable debt levels. The bankers tried to stop the easing in 2019, but risk assets started to break down. So, even though we now we have $17 trillion of negative yielding sovereign debt, central bankers have started easing again. So it’s apparent that central banks have no path to end the experiment. The bankers will keep kicking the can down the road, but how much longer can that go on?
Travis believes if you understand the fiscal backdrop, and understand bitcoin, (as a non-sovereign, hard-capped supply, global, immutable, and decentralized, store of value), it is a stunningly bullish backdrop for the asset. He sees bitcoin as an insurance policy against monetary and fiscal policy irresponsibility by central banks and governments globally. And the the only thing that is certain, is that bankers will get ever more irresponsible given their lack of other options. So insurance against the impact of that irresponsibility seems like a pretty good idea.
While all the speakers have drank the Kool-Aid, they were all measured in their responses, and aware of the challenges ahead. The consensus was that institutional investors are coming in scale, but we’re still 1+ years away. My concern is that we’ll be saying the same thing about institutions a year from now. However, that concern is alleviated by my belief that we don’t need institutional involvement at scale for bitcoin to go dramatically higher. But it would certainly help.
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