Messari: Unlike 2018 this time the agency really came with money

Key Points:

  • Institutional investors are finally starting to drive further growth in cryptocurrencies. Recent reports show that 70-80% plan to allocate portfolios in the short term.
  • Much-needed infrastructure and on-ramp for investments missed in the previous cycle are now available. Lack of regulation was once considered the biggest obstacle to investment. The world’s largest custodian bank recently added cryptocurrency custody.
  • Venture capital and hedge fund capital in the crypto market is at an all-time high and showing signs of continued growth. Compared to the 2017 cycle, they have 100 times as much investment capital available now.
  • FOMO is real. Institutions investing in cryptocurrencies outperformed institutions that did not invest by 2.82% annually.
  • In a yield-starved world, institutions are re-evaluating high-potential-return investments

The trading screen of the crypto market presents a sea of ​​red. Weekly charts are bad, and monthly charts are even worse. Bitcoin has fallen more than 60% from record highs. Ethereum fell nearly 50%. The crypto market suffered a violent crash in just a few weeks.

“But here comes the institution!”, the crypto evangelists shouted in unison on their Twitter feeds. “They’re going to take us back to an all-time high!”

Is this all due to the now deadly pandemic? Do not. The year I’m talking about is 2018. The market crash at the time was largely due to speculation: despite the promise, a nascent industry went a little too far in skiing skills. Traders stared blankly at the screen. Surely institutions will save the day?

Many people are wrong. These agencies did not come to the rescue at that time. Cryptocurrencies are in a two-year bear market. Now, as we are once again falling sharply from all-time highs, the voices of institutions entering the space are getting louder. Then they say the famous last words of every failed investor: This time is different.

What’s preventing institutional investors from entering the crypto market?

Institutions have been quiet since the initial market frenzy in 2017. In their eyes, in the eyes of their advisors, cryptocurrencies have always been:

too risky

Like most new disruptive investments, cryptocurrencies are extremely volatile. This kind of price volatility puts the traditionally conservative institutional crowd off, ironically, given their extremely long investment horizons, who can usually take the most risk. We shouldn’t be too surprised, though. Before 2000, they thought safe-haven assets like commodities were too intimidating to invest in.

In addition to price risk, there are also occupational risks for board members, consultants and employees. Of course, there is a fiduciary risk in investing in something that might go to zero, but I think ignoring the best-performing asset class of the past decade is a real breach of fiduciary duty.

Even if these institutional investors can overcome price and headline risk, they will worry about legal risk. Will cryptocurrencies be banned outright in developed countries like in China?

so new

While Bitcoin has been around for over a decade, most major cryptocurrencies have only been around for a few years. Since the inception of cryptocurrencies, the backdrop has been a huge secular bull run. This gives these assets a limited price history and, more importantly, a limited performance history under different market regimes. This will of course change over time.

so confusing

Cryptocurrency is the intersection of cryptography, computer science and economic theory. These things are not easy to understand and therefore difficult to put into a portfolio context.

It does not need

Most defined benefit pension plans aim for an average return of 6.5% to 7.0% per year. Endowments, foundations, and corporate programs tend to be in the same community. Just a few years ago, a boring 60/40 stock/bond portfolio would have been all you needed to get those returns and more. There is no real reason to consider an asset with an increased risk profile. With interest rates hovering around 1% and stock valuations at all-time highs, the same 60/40 portfolio would have a long-term expected return of 4-5% if we’re generous. Institutional investors now demand new and diverse sources of return.

What makes us think they’re coming now?

Understanding and interest in crypto is growing

Even if investors try to put their heads down, it is almost guaranteed to have learned the basics of cryptocurrencies by osmosis over the past 5 years. The basics of blockchain have been heavily spread on CNBC, Fox Business, Youtube, TikTok, you name it. At this point, any novice investor understands what blockchain is and why it exists.

Whether they plan to invest in individual agreements is of course another matter.

There are signs that market sentiment is changing. Interest and transaction volumes rose. all the way up. In 2021, institutional investors traded $1.14 trillion worth of cryptocurrencies through Coinbase alone, 10 times more than in 2020. One report estimates that as many as 80% of institutions are now allowed to allocate to cryptocurrencies. According to Fidelity, 70% of institutional investors plan to buy digital assets in the near future, and a survey by Nickel Digital Asset Management puts the figure closer to 80%. Understanding leads to action.

Infrastructure is finally here

Even if investors are bent on entering the cryptocurrency space in 2017/2018, this is quite a challenge. There are only a few investment vehicles. Buying cryptocurrencies outright means skipping several legal and compliance issues. Some institutions were asked to use third-party asset custodians, but they were unable to find a reliable custody solution. Asset management, nowhere to be found. Most exchanges and lending protocols are correctly classified as shadow hypercoders, and hacking losses can also reach nine figures. There is no traditional financial infrastructure in place to distribute capital safely. Today, this backbone has matured a lot. Some major developments include:

Custody : State Street and Bank of New York Mellon, the world’s two largest custodian banks, which hold nearly $50 trillion in assets, increased their custody of cryptocurrencies in 2021. Nadine Chakar, State Street’s new head of digital assets, said, “We’re getting calls from endowments and foundations that are accepting cryptocurrency donations and asking how we’re going to handle this? We’re seeing some companies looking at their balance sheet Add cryptocurrencies to the table.” New fintech companies like Fireblocks are also emerging, while traditional institutions have been slow to move. The quality of custody services is the biggest obstacle for institutional allocators to invest in cryptocurrencies.

Exchanges : In 2017, exchanges were mostly nighttime operations for retail or more serious players like Coinbase, who were just starting to get into the institutional space. Today, exchanges like Coinbase, FTX, Binance, Gemini, etc. have been tested with billions of dollars in daily trading volume. Gone are the days when exchanges kept billions of dollars in a hot wallet. Clients can confidently make large trades without fear of losing their funds. Institutional clients made nine transactions on these platforms. These exchanges not only serve developed countries, but are also emerging in emerging markets. Africa-based VALR has more than 500 institutional clients.

Lending : The all-in-one platform provides easy access to attract yields included in DeFi. Goldfinch offers zero-mortgage loans to pre-approved borrowers. Maple Finance provides direct access to high-yield undercollateralized loans. Meow offers investors a range of options based on risk tolerance, from over-collateralized to under-collateralized. Despite the complexity behind these products, investors can make allocation decisions based solely on their risk and reward profile.

Products licensed through Aave allow vetted institutions to lend to each other, addressing many of the potential regulatory hurdles of traditional financial institutions. Investors may not be able to prove whether they are dealing with terrorist groups, but the underlying protocol can verify that they are not. Fireblocks is a platform that provides backend solutions for seamless integration between custody and DeFi.

Investable Vehicles : In 2017, venture capital and hedge funds totaled around $1-2 billion, focusing on crypto investments. In 2021, crypto investment in the venture capital space is $33 billion, with more than 800 hedge funds allocating $68 billion. This is about 100 times the investment in this area. Here are thousands of new funds available for institutional players to invest in. Additionally, ETP/ETF (albeit challenging) and BTC/ETH futures can now be bought and sold with daily liquidity.

Research: The 2017/2018 cycle lacks true professionals dedicated to full-time research. Now some companies are “panicked” and start to specialize in the investment case of the crypto macro environment and personal assets.

There is a lot of venture capital

The largest institutions typically allocate a few percent of their portfolio to venture capital. Endowments over $1 billion were allocated an average of 11%. Venture capitalists invested less than $1 billion in cryptocurrencies in 2017. In 2021, the industry has grown 11 times in the fourth quarter alone.

Messari: Unlike 2018 this time the agency really came with money

Source: Galaxy Digital‌

In addition to the money actually invested, many funds have substantial fund reserves to continue driving growth. Paradigm and a16z alone have deployed nearly $5 billion from funds raised in 2021. Even the $33 billion in capital deployed in crypto companies represents only 5% of the total VC investment deployed in 2021.

The money is really coming in

Capital ultimately comes from large institutional players, not just outspoken proponents like Microstrategy. Tesla, Galaxy Digital, Block (formerly Square), BlackRock, Morgan Stanley and others have added cryptocurrencies to their balance sheets. For example, Pacific Investment Management, with $2 trillion in AUM and hundreds of institutional clients, is now using their funds to trade cryptocurrencies and expand their offerings. Insurers like MassMutual and NY Life are helping launch institutional-grade bitcoin platforms. Even old-school accounting firms have joined the move by the Canadian arm of Big Four audit firm KPMG to add bitcoin, ethereum and NFTs to its balance sheet. Looking at BTC alone, we see that 39 public companies have allocated around $14 billion. The crypto platform for institutions said their inquiries were 2-3 times higher than in the previous quarter.

Traditional pension funds are also starting to gain traction. The Houston Firefighters Relief and Retirement Fund allocated $26 million to BTC and ETH. The Fairfax County Police Retirement System and the Fairfax County Employees’ Retirement System increased their existing $70 million grants. Australia’s fifth-largest superannuation fund, with more than $70 billion in assets under management, is planning a grant. Its largest pension, AustralianSuper with $177 billion in AUM, was hesitant to make direct token investments but expressed interest in DeFi. Harvard, Yale, and Brown are thought to be accumulating Bitcoin in 2021.

Why now?

More investment commodities available

Institutional investors build everything in a portfolio environment. Which bucket is this investment suitable for? Is it an adventure/adventure? Inflation Hedge? Interest rate hedging? Growth or value investing?

Since crypto has a fairly short history, there isn’t enough cycles to sort out these things. But over time, the correlation and crypto behavior became clearer. BTC/ETH is becoming less and less correlated with the riskiest parts of the market. Since BTC has the longest price history, we can better analyze its performance in traditional portfolios.

Messari: Unlike 2018 this time the agency really came with money

Source: Bitwise‌

Despite being highly volatile, BTC increases the risk-adjusted return of a portfolio by up to 10%. Compared to a standard 60/40 portfolio, a 5% allocation appears to be the sweet spot where risk-adjusted returns level off and investors get an improved maximum portfolio drawdown, while a 4% ETH allocation would result in a similar result.

Yes, having an average allocation of 4% Bitcoin in your portfolio can limit your return drawdown during the most stressful times compared to a traditional portfolio without Bitcoin. Analysis that assigning 4% to Ethereum would lead to similar results.

As crypto becomes a more accessible commodity in the portfolio environment, advisors, board members and investors who lack the theoretical ammunition to support their arguments can now make a case for inclusion in a portfolio.

clearer regulation

Cryptocurrencies have been walking on a regulatory tightrope and have pushed aside the inherently risk-averse institutional crowd. Before investment begins to flow in, these institutions need to have a clearer picture of what is and isn’t allowed.

We found after 2017 that ICOs were largely unfeasible. It’s hard to start, and in July 2020, the OCC authorized banks and savings institutions to take custody of cryptocurrencies. Take small steps forward. In October 2021, we found out that the US will not ban cryptocurrencies like China. Progress step by step. In March 2022, we learned that a Biden administration is exploring regulation in the context of promoting innovation and economic opportunity. Getting better and better.

So, despite the small amount of formal regulation, there are enough signs that cryptocurrencies are here to stay. The Biden administration has called for more specific regulations by mid-2022, which would help clarify the viability of certain business models in the space.

Seize investment opportunities

A bullish macro story for cryptocurrencies can be constructed in a number of ways. The next iteration of the internet underpins everything we do, unleashing limitless price upside. An asset class worth $2 trillion has the potential to grow to over $200 trillion, like global real estate, or over $100 trillion, like stocks and bonds. The new monetary base in M2 is as high as $100 trillion or more. Sub-sectors such as DeFi have the potential to surpass the roughly $25 trillion global financial services industry. This new store of value will surpass the $13 trillion precious metals market.

Whether you believe all or some of these frameworks, there is room for 2, 5 or 50x upside across the entire asset class. In a yield-scarce world, the return potential is too great to miss. Institutional investors are also seeing their peers already investing in crypto have recognized some of these advantages and ignored them. Institutions investing in cryptocurrencies outperformed institutions that did not invest by 2.82% annually.

On a more micro level, the yield on a particular token or DeFi pair is extremely attractive. The hurdle so far has been accessing them and understanding their potential risks. You cannot get more than 100% APY without taking the risk. As mentioned, many new entrants are making these gains as easy as a click. They also help investors feel comfortable with the risks they take: impermanent losses, smart contract risks, etc. At the most conservative level, overcollateralized (~150%) BTC loans earn up to 4% through Meow. Aave offers similar products and benefits for simple cash deposits – 10 times what investors get from money market funds.

Investors are finally able to realize the Proof of Stake (PoS) benefits gained by helping secure individual networks. Many major protocols have collateralization ratios in excess of 10%, but technical challenges prevent institutions from accessing these gains. Staking-as-a-service solutions have emerged from Coinbase and others to provide access to these earnings without worrying about backend processes.

What’s the impact?

As mentioned above, many corporations, pensions, endowments, and foundations have or have made allocations to crypto. Nation states and their sovereign wealth funds are close behind. These funds control $9 trillion in assets. Binance is in talks with several sovereign wealth funds about a major investment in its company. UAE-based Mubadala Investments, which controls $243 billion in assets under management, began investing in the crypto ecosystem.

This is only a breakdown of the demand side if institutional players start to use cryptocurrencies as a small part of their portfolios.

Messari: Unlike 2018 this time the agency really came with money

These investments are coming. Whether it’s 1%, 5%, or 10% is anyone’s guess, but we do know that these investors will bring more legitimacy to the space. They will drive more marketing space. They will attract more users to the space. They will bring more builders to the space. Most importantly, they will drive more investment in technology, growth and innovation.

Although a few years behind schedule, the agencies are finally here.

Posted by:CoinYuppie,Reprinted with attribution to:
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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