While decentralized networks and blockchain technology are the root of the crypto revolution, the potential to generate new wealth is a direct motivator for many crypto enthusiasts and ordinary citizens alike. The current market cap of cryptocurrencies is a small amount compared to the US stock market ($70+ trillion), however the NYSE was founded two centuries ago. Anyone investing in cryptocurrencies knows there is massive volatility and market speculation.
The financial environment for cryptocurrencies must be analyzed from a bottom up approach at a macro level in order to succeed on an institutional level. Below I outline the different stages to picture a clear path for cryptocurrencies to be the next evolution of financial markets.
During the beginnings of Bitcoin, few fortunate people who knew of it were able to mine BTC on a laptop (myself included). At the time they were fascinated by the concept of digital “mining” on an immutable “blockchain” record, and generating wealth from a piece of hardware. Fast forward to the last 12 months and there has been an influx of average citizens trying to get a piece of the crypto pie, with exchanges on-boarding more than 250,000 users daily and transacting billions in daily volume. However, most of these token holders came solely for the 1000%+ ROIs rather than understanding the core technology of what they invested in. Inevitably, this resulted in a market crash, fraudulent ICOs, and an accumulation of more than 1000 different tokens, most of which are unheard of with no MVP as well as down 90% from their ATH (all time high).
By definition of the SEC, “To be considered an accredited investor, one must have a net worth of at least $1,000,000, or have income at least $200,000 each year for the last two years.” As the market cap of cryptocurrency begins to rise and the top market cap coins such as BTC and ETH become less likely to fail, accredited investors are depositing their disposable income, self-directed RIAs, etc. into digital assets. They are also diversifying into “promising” altcoins after witnessing many failed tokens during the recent bear market in order to “bank” on the next big BTC/ETH. Currently, the US public is waiting on a decision to approve an ETF by the SEC by the end of September (previously August 10th). The approval of an ETF (exchange traded fund) would result in the the general public being able to participate in BTC without necessarily having the added volatility. ETFs are also more liquid when compared to mutual funds or hedge funds — thus making it easier to buy and sell them for lower net worth investors. I believe the ETF proposal with the highest chance of approval will be the CBOE one, given their history in the financial market for options.
Pooled Investment Funds
These range between VCs, hedge funds, index/mutual funds, and PE firms. Traditionally, most hedge funds have $100M in AUM to qualify in the world of Wall Street. However, with the market cap of cryptocurrencies being so low, most VCs and hedge funds are investing or raising less than $50M in the past year to solely invest in cryptocurrencies. Private equity is another type of late stage fund which generally invests in cash flow generating companies. I’ve spoken to multi-billion dollar VC/PE firms during the last bull run who have expressed interest in cryptocurrencies, yet are still hesitant as a whole due to the early stage and speculative nature of the market. As the market cap of crypto grows into the trillion dollar range, we will start seeing larger institutional investment and PE firms diversifying into blockchain technology companies.
In Q4 of 2017, Jamie Dimon, CEO of JPMorgan & Chase, was famously quoted by claiming Bitcoin was a “fraud”, which he later retracted and said, “The blockchain is real”. Recently, we have seen a major shift in the banking industry from Chase adopting blockchain technology and Goldman Sachs investment Circle acquiring exchange Poloniex and opening a trading desk for Bitcoin futures. The CME has already traded Bitcoin futures and customers are asking their banks for options to trade Bitcoin. A private Swiss bank in Zurich called the Falcon Group allows their clients to purchase Bitcoin and even installed Bitcoin ATM’s. According to a UBS 34 page study (see footer), they believe BTC could replace the US Dollar one day, given more price stability. While I am uncertain if Bitcoin will be the “coin” to replace the Dollar, I do believe through the next several years there will be a paradigm shift from government issued traditional fiat being transitioned into their tokenized form.
Family Offices/Sovereign Wealth Funds
One of the largest groups of financial wealth include family offices and sovereign wealth funds, yet most people have never heard of them. Family offices are wealth management and advisory firms for ultra-high net worth clients with assets under management hovering around $900M on average. The managers of these family offices generally invest in several investment vehicles ranging from equities, real estate, private equity, ETFs, and fund of funds. However, most family offices are dedicated to preserving capital that an individual or family has accumulated, rather than invest it in highly volatile assets. For example, if the upside to a certain crypto investment is 10 basis points yet the risk is 40% or more, it would not make sense for a family office advisor to invest in such a market. The same principle applies to sovereign wealth funds or governments who tend to take a more conservative approach to investing. However, there are many family office events that are now curating speakers towards educating cryptocurrency.
With all that being said, the following problems need to be addressed in order for the traditional financial systems to fully adopt cryptocurrency and blockchain technology for a successful crypto financial revolution.
- High volatility and risk
- Low liquidity
- Speculative and manipulated markets
- Low market cap and age of adoption
- Digital custody of assets
- Token valuations correlated to KPIs rather than “hype”
In order for cryptocurrency to become a mainstream investment vehicle — which inevitably it will — there must be solutions to the aforementioned problems. Volatility and risk is correlated with the low liquidity and market cap of cryptocurrencies as compared to the large liquidity and market cap of the stock market. As a side effect, market manipulation is heavy with large “whales” making shifts in the market and often pumping and dumping certain coins. With increased regulation to protect investors from insider trading, pump and dump schemes, and fraudulent ICOs, we will see more institutional money entering the playing field. As a fund manager, I’ve spoken to several institutions looking to purchase $50M+ worth of top market cap tokens for long term holds of more than 5 years. This is good news indicating there are many institutional players entering the market by seeing the long term potential of cryptocurrency and decentralized network technology. Personally, I’m very bullish, but then again, I’ve been following Bitcoin for quite a long time.
Disclaimer: The information provided and accompanying material is for informational purposes only. It should not be considered legal or financial advice. You should consult with a financial advisor or other professional to determine what may be best for your individual needs. There is no guarantee that any investment will achieve its objectives, generate profits or avoid losses, and past performance is not necessarily indicative of future results.
Investments in cryptocurrencies or funds pursuing investments in cryptocurrencies and related assets (“crypto assets”) are very speculative and can involve a high degree of risk. Investors must have the financial ability, sophistication, experience and willingness to bear the risks inherent with crypto assets, and the ability to handle a potential total loss of their investment. Digital or crypto assets are not suitable or desirable investments for all investors.
Jamie Dimon says he regrets calling bitcoin a fraud and believes in the technology behind it
Along with his earlier bitcoin is a “fraud” statement the executive also blasted digital currency investors last year…www.cnbc.com
Also published on Medium.