Why would professional investors adopt DeFi faster than they adopt Bitcoin?

The road ahead for DeFi is turbulent, but the long-term outlook is exciting, and institutional investors may enter the DeFi market sooner than expected

Why would professional investors adopt DeFi faster than they adopt Bitcoin?

Note: This article was written by Matt Hougan, who is the Chief Investment Officer of Bitwise Asset Management, Inc. which is one of the largest and fastest growing cryptocurrency asset managers in the world. Prior to joining Bitwise in 2018, Matt had a ten-year career in the exchange traded fund (ETF) industry and was the CEO of ETF.com and Inside ETFs.

Why are professional investors adopting DeFi faster than they are adopting Bitcoin?

Professional investors are “getting” DeFi much faster than they are getting Bitcoin (or Ether).

That’s not conjecture; it’s fact.

As the CIO of Bitwise Asset Management, I had a front row seat to a test case of this hypothesis.

Bitwise is one of the largest and fastest growing cryptocurrency asset managers in the world, with $1.5 billion in assets under management[1] . We primarily serve professional investors, including financial advisors, family offices, and institutions.

We are best known for creating and running the world’s first and largest cryptocurrency index fund, the Bitwise 10 Cryptocurrency Index Fund. the Bitwise 10 holds the top 10 cryptocurrency assets weighted by market capitalization. For investors, it’s a convenient way to get access to assets like Bitcoin, Ether and Chainlink in a simple fund portfolio.

We launched Bitwise 10 in November 2017. today, the fund has about $1 billion in assets. However, this growth is going to take time. Keep in mind that the fund did not cross $100 million until after October 2020, or nearly three years after launch.

By comparison, in February of this year, we launched the world’s first DeFi index fund (we like to be the first.) The Bitwise DeFi Cryptocurrency Index Fund holds the top 10 DeFi assets, including Uniswap, Aave, Compound, Maker, Synthetix, and more, weighted by market capitalization. Its purpose is to make it easy for investors to bet on DeFi’s growth, rather than trying to pick winners.

Unlike the Bitwise 10 cryptocurrency index fund which took several years, our DeFi fund reached $100 million in three months.

Part of the reason for the rapid growth of the DeFi fund is due to market conditions and partly to better execution by the Bitwise team. But another reason is that DeFi is easier for traditional investors to understand than Bitcoin or Ether.

This time (not) different

When you get a job in traditional finance, one of the first things you learn is that the four most expensive words in the English language are “this time is different” (“this time is different”).

The history of investing is filled with the wreckage of paradigm shifts that were overhyped and never worked. The scars of the Internet bubble, the housing bubble and a dozen other speculative manias are etched in the memories of many on Wall Street. While a few investors remain open to new ideas, most will choose to leave in a hurry.

Bitcoin is certainly the “new thing”. No one will look at Bitcoin and say: Remember the last time a new global currency was born without sovereign backing and turned into an asset of about a trillion dollars? [2]

DeFi, however, is familiar to traditional investors.

Over the past four decades, traditional investors have watched software and technology disrupt industry after industry. Manufacturing, media, telecommunications, retail …… It’s a relentless, slow-moving wave of disruption that has swallowed up everything in its path.

As Mark Andreesen says, software is eating the world. [3]

So when you tell investors that decentralized finance involves using software and automation to disrupt the financial industry, their eyes light up. They’ve seen the “movie” and they know how it ends. And they like the ending, a lot.

Powerful examples: Uniswap and Aave

However, it’s the real-world examples like Uniswap and Aave that really get traditional investors excited about DeFi.

When you first describe DeFi to someone who isn’t in the cryptocurrency community, they may think it’s a message from the future: an idea that’s cool in concept, but far from practical application.

Examples like Uniswap and Aave show that DeFi is already here.

For example, while Uniswap is overly simplistic, it is easy to introduce it as a decentralized competitor to Coinbase. Traditional investors know Coinbase, which recently went public at a $60 billion valuation, making it the largest publicly traded cryptocurrency company in the world. It’s an amazing business with a fast-growing user base and huge revenue growth.

But Uniswap is growing even faster. From ground zero a few years ago, Uniswap reached $50 billion in transactions last month while generating over $250 million in fees. [4] This is incredible.

Similarly, Aave is a relatively new lending protocol that is a decentralized competitor to BlockFi. At the time of my last check, on May 16, it had over $8 billion in outstanding loans and was generating over $1 million in revenue per day. [5]

These are numbers that traditional investors can understand. They are in the vernacular of Wall Street: revenue growth, user growth, and so on. You can even apply traditional valuation techniques, such as price to sales multiples. However, valuing Bitcoin is exceptionally difficult. [6]

Educational Advantage: The Most Valuable Commodity

In traditional investing, an advantage refers to knowing something that no one else knows. It is the Holy Grail: a mythical thing that most investors chase, but many have never seen.

One of the reasons I love talking to traditional investors about DeFi is that it’s a rare opportunity that just might give them a possible edge. Because while many investors get excited when they hear about DeFi, almost no one has heard of it yet. Most of the mainstream media and Wall Street have ignored it so far.

Imagine if Uniswap wasn’t a decentralized crypto protocol, but a well-funded traditional Silicon Valley startup. Then, investors would be all over it.

Just look at this business! Two years ago it was nothing, and now it’s a big company. Two years ago it was nothing, now it generates $250 million a month in revenue!

The founder would appear on the cover of Forbes, posing on a rocky promontory, wearing a Patagonian undershirt and gazing out to sea under the breathtaking headline: The Fastest Growing Startup Ever.

But because it was just a cryptocurrency asset with a pink unicorn logo and an unlikely backstory, it was overlooked. To this day, the word Uniswap has never appeared in the Wall Street Journal.

The road ahead for DeFi is going to be extremely turbulent. It’s a very early stage market that faces a huge set of challenges, from regulatory risk to pro-cyclical leverage to security issues and more.

But the long-term outlook for DeFi is exciting and the story can be compelling, and I believe institutional investors may enter the market sooner than many think. [7]


[1] CNBC. “Some well-known PayPal veterans just invested in the world’s first cryptocurrency index fund,” Dec. 12, 2017.

[2] Source: CoinMarketcap.com. data as of May 16, 2021

[3] Source: a16z. a16z.” Why Software is Eating the World.” –Marc Andreesen.

[4] Source: A16z The Block and Token Terminal. data as of May 16, 2021.

[5] Source: Token Terminal. data as of May 16, 2021.

[6] Critics will point out that Uniswap token holders are not currently accruing any of the revenue generated by the protocol. This is not a problem. It is expected that token holders will appropriate a portion of the fees in the near future. Traditional investors have seen pre-revenue companies like Facebook before and understand that user growth is a key metric to watch.

[7] Investments in crypto assets are inherently risky, including the possible loss of principal. Nothing in this article is or should be construed as a recommendation to buy or sell any security. Past performance is not an indicator of future performance.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/why-would-professional-investors-adopt-defi-faster-than-they-adopt-bitcoin/
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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