Tom has over 30 years of experience in the payments industry, including serving as CFO for various Visa International entities from 1980 until 1999, retiring with the title of Group EVP and Treasurer.
Discussions these days around the water cooler for large institutional investors are no longer asking what is Bitcoin. The entire tenor of the conversations has morphed in a single year into a much broader context. The questions are now more likely about when and how do we jump into the market, how do we protect our interest, and how much should we invest. In other words, large banks, money managers, pension funds, and even endowment funds have already completed their due diligence, at least those that sat on the fence and held off being a “first responder” to Bitcoin’s siren call.
The mania that permeated the 2017 hyperbolic run up in valuations resulted in a foreseeable collapse. The price climbs were not sustainable, the product of mass speculation, as if there were no tomorrow. In many ways it resembled the early Internet development years, when a similar asset bubble burst when reality set in. Too many veterans of Wall Street remember those times and are still nursing the crippled companies that somehow survived. Crypto Winter was the equivalent period in the crypto-verse. No one wants to relive those times, or the ones nearly two decades ago.
But times, they are a-changing. A host of companies, investment dollars, and events are collaborating to build the railroad tracks that large institutional investors will willingly ride upon, after they take the plunge. If you are concerned about custody, after being turned off by what appears to be fraud on a massive scale, there are several entities addressing these needs. Fidelity Investments leads the pack with institutional-grade custody services to beat the band, which have become the standard in the equity industry and what regulators expect to see in Crypto-Land. Coinbase, the largest American crypto exchange, just acquired Xapo Ltd to enhance its own custody service offering, as well.
Does volatility bother the Big Boy crowd? Of course it does, but they have learned how to hedge their positions, as long as they have access to the right tools for blocking in a position. The CME has been offering futures contracts for quite a bit of time, but these instruments are settled in cash. The “tool” becomes much more effective when the settlement must be made “in kind”. The Bakkt exchange, the brainchild of ICE, the owner of the New York Stock Exchange, has just received clearance to offer “physically settled” futures contract in September, both daily and monthly varieties. Right behind them, you also have LedgerX, ErisX, and Seed CX about to hit the market with similar “tools”.
Wired.com interviewed John Sedunov, a professor of finance at Villanova University, about his observations of why the largest moneyed interests are finally warming up to the notion of Bitcoin and other cryptos. What he sees is a multitude of changes from 2017 that are what was needed to make cryptos appealing for large institutional investors, who could easily poor hundreds of millions of dollars into the crypto arena in a heartbeat.
There has been much talk recently of Bitcoin becoming a valid “safe haven” port in the storm. Correlations of capital flight flows with Bitcoin rallies have demonstrated, as much, but volatility remains the big issue. Last week, recession fears drove equities into a tailspin, but Bitcoin followed it, not the other way around. Both have bounced back, more so for Bitcoin, but volatility makes being a safe harbor a bit more difficult to accept. Per Sedunov: “There’s uncertainty in where we’re heading, and that makes cryptocurrency more attractive.”
Many concerns revolve around anecdotal evidence, as in last week’s “safe haven” correlation breakdown, but Sedunov counseled everyone in both the institutional and crypto enthusiast camps to step back. It is easy to overreact during these times, when changes are coming at us at a feverish clip. His words of wisdom were: “There’s going to be growth spurts, setbacks, all these things that come with figuring things out. It’s a somewhat fragile ecosystem right now.”
Lastly, access has been a roadblock for many money managers that do not have an easy way to access the market, especially in a diversified manner. The fabled Bitcoin ETF would solve many of these problems, but the SEC has blocked or delayed over two-dozen applications in the past few years.
Matt Hougan, Bitwise Asset Management’s global head of research and a firm with an application in the SEC pipeline, recently spoke with Bloomberg UK about his firm’s prospects. Hougan is optimistic and noted the potential impact of a U.S.-based BTC ETF: “A key aspect to a Bitcoin ETF in the U.S. is that it unlocks the financial advisor marketplace. So far crypto has focused mostly on retail investors […] or institutional investors […] Half the money in the U.S. is managed by financial advisors, and right now it’s very difficult for them to access that market.”
When will the Wall Street dam burst in favor of Bitcoin and other cryptos? A recent survey taken by Fidelity of 400 of its institutional clients might give us an indication of how sudden major capital moves may be in the offing. The results: 22% of clients were already “in the crypto pool”, so to speak, and another quarter recognized the potential. This near majority has spoken, and that was last May. A lot has changed since then.
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