How did institutional investors look at the market in 2019?
In 2019, the users of the crypto were discussing many issues. These were Bitcoin halving, Ethereum 2.0, Bakkt, ETF on Bitcoin, as well as institutions and institutional investors. It was the big corporations and investment funds that were supposed to revive the crypto market and bring growth. The Bakkt and ETF platform was to be the window through which billions of dollars were to pour into the crypto market. However, this did not happen. However, institutional investors behaved very cautiously and were sceptical about the cryptic market in 2019. During their observations, however, they drew some conclusions, which we will discuss today. You’re welcome.
There’s Bitcoin, and then everything else
The industry is currently divided into two main categories: Bitcoin and everything else. “Everything else” includes: Web3 innovation, decentralised finance (“DeFi”), decentralised autonomous organisations, intelligent contract platforms, security tokens, digital identity, data privacy, games, business blockchain technology or distributed general ledger technology and much more.
Newcomers who are not familiar with cryptocurrencies are rarely aware that there are multiple chains of blocks. Bitcoin, since it is the first blockchain network to be introduced into the mainstream and being the largest digital asset in terms of market capitalisation, is often the first stop for many new entrants and is likely to remain so in the foreseeable future.
Bitcoin may be a risk determinant
In traditional equity markets, beta is defined as a measure of the volatility or non-systematic risk that individual shares have in relation to the systematic risk of the market as a whole (as is the case, for example, with the CAPM model). The difficulty in defining a “marketable beta version” in a space such as digital assets is that there is no market benchmark such as S&P 500 or Dow Jones for shares. Since cryptocurrencies are still at a very early stage of development and Bitcoin has a dominant market share, it is often seen as the obvious choice for beta, i.e. a risk benchmark. And yet it is very risky itself!
The size of Bitcoin and its institutionalisation (futures, options, storage and clear regulatory status as a commodity) made it an attractive first step for distributors who want to get exposure (both long and short) to the digital asset market, suggesting that Bitcoin may be a beta position in the digital asset market for the time being.
Increased interest by institutional investors in 2019
Education, education, education. Blockchain technology and digital assets represent an extremely complex class of assets – one that requires a non-trivial take up of time to go down the right learning path. While a handful of institutions have already started to invest in cryptocurrencies, in reality they have managed to obtain a very small amount of institutional capital (compared to the wider institutional market), measured by the size of the asset class and the volumes traded in the public market.
The reality is that institutional investors are still learning – they are slowly beginning to feel comfortable – and this process will still take time. Despite educational progress in 2019, some institutions are wondering whether it is still too early to invest in this market and whether they can potentially engage in investing in digital assets in the future and continue to generate high returns, but in a way that does not threaten their liquidity.
Last straight or next turn?
Another trend we saw this year was a move away from complexity towards simplicity. We saw a significant increase in straight, passive and low-cost structures to take a position in the crypto market. In addition to the Grayscale Bitcoin Trust, other products were launched focusing on the most popular cryptocurrency. These include Bakkt, two new Galaxy Digital funds, a bitcoin product from Fidelity, the TD Ameritrade Bitcoin trading service on Nasdaq via a brokerage platform, and the recent approval by SEC Stone Ridge Asset Management for its Bitcoin NYDIG strategy fund, based on cash-settled futures.
We have also noticed a growing institutional appetite for simpler HF and VC fund structures. Over the past few years, a number of fundamental, hidden-architectural hedge funds have managed structures that have enabled a strategic approach to investing in both the public and private digital asset markets.
From cryptography to “real” solutions
Another trend that we have seen this year is greater migration than the cryptocurrencies themselves towards digital assets for financial and business use. A form of economic utility that has appeared on the scene this year is the concept of software-based security economics. The advantage of digital security is that it can be smooth and economically productive while serving its primary purpose (securing another asset). If assets can be allocated to multiple purposes simultaneously, with properly managed risk, we should see more liquidity, lower cost of borrowing and more efficient allocation of capital in a way that the traditional world may not be able to compete.
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