Institutional Crypto Buying Taking Over
Price volatility is definitely back in the crypto space. The price of Bitcoin, (which is the driving indicator everyone pays attention to) soars rapidly higher and then aggressively pulls back to test previous important levels of resistance, to see if they have indeed turned into support. What people often fail to understand when simply analysing the price however, is the role that the biggest actors in the room, the institutional investors, have been playing quietly in the background, to start, and then fuel, this new bull market.
Unlike most other asset classes throughout history, crypto investment began with retail trading, not adoption by institutions. Early adopter crypto funds soon followed. Now it’s the turn of major institutional investors.
Last month Fidelity Investments, the fifth largest asset manager in the world, released findings that showed why institutional investment in crypto is likely to grow significantly over the next five years. Fidelity surveyed 441 institutional investors,?such as endowments, financial advisors, hedge funds and pensions?, from November to February on their outlook on crypto investing.
• 22% of respondents have already purchased cryptocurrency? (a remarkable increase from near-zero in 2016)
• 40% of respondents said that they are open to future investments in digital assets in the next five years
• Nearly half of respondents? (47%) ?said that they see a place for digital assets in their investment portfolios.
In terms of how they invest, Fidelity found that 72% prefer purchasing investment products that hold or represent digital assets, such as futures, while 57% choose to purchase cryptocurrency directly or to buy equity in digital asset-related companies.
With figures like that, there can be no doubt that the era of institutional engagement in crypto has arrived.
Actions speak louder than words, and major institutions are stepping up to the plate. Here are three examples:
1. Fidelity Investments. Fidelity has already taken a lead. It formed a new company last year, called Fidelity Digital Assets, through which it is building “the technical and operational capabilities needed for securing, trading and supporting digital assets with the exacting oversight required by institutional investors.” Earlier this year, it announced it was beta testing its trading and custody solutions with a “select set of eligible clients.”
2. Bakkt. Bakkt, a digital asset exchange from Intercontinental Exchange (ICE), owner of the NY Stock Exchange was expected to launch late last year and is now scheduled for late this year, with beta testing this summer. It will be one of the first institutionally backed cryptocurrency trading platforms as well as the first to launch physically settled Bitcoin futures. The platform is expected to bring in a large number of institutional investors by providing them with a regulated ecosystem for investing in and securely storing crypto. It could be a critical factor in triggering the next crypto market bull run.
3. The First Pension Fund Investments. Conservative institutions, led by two pension funds, funded a new Morgan Creek crypto-focused venture fund to the tune of $40 million in February. Morgan Creek is an asset manager focused on institutional clients and family offices. The two public pensions anchoring the fund are Fairfax County, Virginia’s Police Officer’s Retirement System and Employees’ Retirement System. Other fund investors include a university endowment, a hospital system, an insurance company and a private foundation.
In addition to the above, Facebook recently released the details of its own crypto asset “Libra Coin” which is due for launch next year, while JP Morgan became the first U.S. bank to create and successfully test a digital coin representing a fiat currency. While both coins are fiat backed, centralised tokens that pose no real threat to true crypto, their pending release only further legitimises the space as an emerging asset class, worthy of institutional level capital.
The question then becomes shouldn’t crypto prices already reflect the institutional buying? In short, no. The majority of institutional buying happens Over The Counter (OTC) so volume and pricing on spot exchanges in not a reflection of what happening behind the scenes. OTC trading allows investors to carry out trades directly with one another without relying on the services of an intermediary such as a cryptocurrency exchange. OTC trading services in digital assets are particularly appealing for institutional investors, who are increasingly using the OTC desks of firms like Circle and Coinbase.
The OTC trading desk at cryptocurrency finance firm Circle (whom Goldman Sachs owns a stake in) had huge notional volumes in 2018. Circle executed 10,000 OTC trades with 600 different counterparties, at $24 billion in volume. As such, the company claims to have become a “core liquidity provider to the entire crypto ecosystem.” According to Circle, the firm now partners with over 1,000 institutional clients such as exchanges, token projects, OTC desks, asset managers, and other global endowments. Circle stated:
“This year, we anticipate further incremental growth in institutional adoption catalysed by stablecoin usage, advancements in institutional custody solutions, increasing regulatory clarity particularly in the United States, and improvements and innovation in core crypto infrastructure.”
This means that during the crypto winter of the past 18 months, the smartest, most cashed up investors on the face of the earth have been quietly accumulating crypto assets while the majority of retail investors have sold their holdings. But don’t be discouraged. For some perspective, Fidelity has over 2.5 Trillion (with a ‘T’) dollars worth of assets under management, while Apple and Google have a market cap of 910 Billion and 751 Billion respectively. Meanwhile, the entire crypto market cap as of today is only 290 Billion in total, still 540 Billion off its previous all-time high. Still think you’re late? Not even close.