At last month’s Consensus 2023, CoinDesk hosted two invitation-only Investor Manager Roundtables, one designed specifically for institutional investors (35 pensions, single family offices, sovereign wealth funds, and endowments and foundations) and the other for asset allocators (50 fund of funds, asset managers, and pension consultants).
With the help of AIMA’s Michelle Noyes (thank you, Michelle), I presented the same 10 survey questions to both groups and recorded their responses in real time to get a sense of how these mostly TradFi investors are thinking about crypto. (About half of the managers were “crypto natives”).
Angelo Calvello, Ph.D., is co-founder of Rosetta Analytics, an investment manager that uses deep reinforcement learning to build and manage investment strategies for institutional investors.
The lede: So after the spectacular collapses of FTX and Celsius and the crypto bear market, how are institutions feeling about the future of digital assets? Astonishingly bullish, with almost 70% of institutional investors view crypto investing favorably, while over 95% of managers do so.
Another indication of the groups’ bullishness is their responses to, “When will we see large-scale institutional investments in crypto?” 32% of institutional investors said it is already here, with 16% saying they expect it in 1-3 years and 36% in 3-5 years. (Keep in mind this group self-identifies as long-term investors). Only 4% said large-scale institutional investment will never occur.
Managers were less bullish on the short-term prospects, probably because they have seen an immediate decline in AUM, with just 12% agreeing “it’s already here.” However, 46% expected such adoption in 1-3 years and 30% in 3-5 years. Unlike institutional investors, the managers could be talking their own book.
The relative bullishness of both groups’ responses was surprising, given their single greatest concern was U.S. regulatory uncertainty (72% institutional investors and 76% managers). I would have expected both groups to be decidedly bearish or at best neutral on crypto investing and their outlook for crypto to have diminished, especially because the survey was administered after the Coinbase’s Wells Notice, SEC Chair Gensler’s April 18 testimony before the House Financial Services Committee, and the widely held view that this regulatory uncertainty is likely to continue for a while. A handful of institutional investors also expressed concern about cyber fraud and market manipulation, while several managers were concerned with subject complexity and volatility.
Yet, their responses to “What event is most likely to be the catalyst for investing, or increase your investment, in crypto?” reveal a pent-up demand. Both groups selected “clarify the U.S. regulatory framework” as their number one catalyst (60% of institutional investors and 64% of managers). And, harkening back to my maiden CoinDesk op-ed in February, their second choice of a catalyst was “solid investment opportunities” (32% of institutional investors and 27% of managers). So, crypto still needs to put on big boy pants if it is to attract serious TradFi investments.
The events of 2022, including the FTX scandal, did little to change their sentiment toward crypto investing, but these events are causing many institutional investors to upgrade their due diligence processes. 85% of institutional investors admitted they would improve their due diligence by spending more time vetting deals (52%), demanding more transparency on deals (52%), and digging deeper into operational risks (48%). (This survey question allowed respondents to make multiple choices.)
Their enhancements reveal that they have learned from both Perhaps Ontario Teachers Pension Plan’s and CDPQ’s write-downs of their investments in FTX and Celsius that as fiduciaries their due diligence of crypto investments must be at least as rigorous as that used for TradFi investments.
Managers also plan to change their diligence processes, spending more time vetting deals (36%), demanding more transparency (42%), and digging deeper into operational risks (36%). Yet, investors beware: 27% said they would make no changes, leading me to wonder how a manager could have such hubris given their target market’s responses and Sequoia’s (and other managers’) FTX experience.
Because much has been written in the past twelve months about BTC’s inherent investment benefits, we asked the groups the following (the groups’ percentage responses are in brackets): Do you believe BTC is....
A store of value (20% for institutional investors/43% for the other allocators)
A portfolio diversifier (28%/30%)
An inflation hedge (4/0)
A hedge against banking infrastructure (12%/15%)
A reserve currency (12%/6%)
A medium of exchange (16%/3%)
A venereal disease (a la Charlie Munger) (8%/3%).
Institutional investors cast votes for the predictable favorites, with most considering bitcoin a store of value and a portfolio diversifier and a handful viewing BTC as a hedge against banking infrastructure, a reserve currency, and a medium of exchange.
However, only 4% of the institutional investors and none of the managers considered BTC as an inflation hedge, rejecting the trope advanced by TradFi analysts, crypto insiders, and the media in 2021 and 2022. Who would have thought BTC as an inflation hedge would garner fewer votes than Charlie Munger’s metonymy?
For our final question, I asked, “What investment theme are you most excited about over the next 12 months?” And both groups’ responses were again bullish: institutional investors and managers selected the tokenization of funds and/or real assets as their top choice (52% and 52%). Surprisingly, at least to me, 20% of institutional investors and 24% of managers chose “long BTC/ETH,” while 16% of institutional investors selected “gaming.”
I’ll admit that this survey was less than scientific and skewed: the participants chose to attend Consensus and accepted invitations to these private sessions, so this is a self-selecting group Yet its overall bullishness bodes well for the crypto industry and crypto investing but with the proviso that the U.S. state and federal regulators reach a consensus that, borrowing a term from environmental policy wonks, is loud, long, and legal.