Noelle Acheson is a veteran of company analysis and a member of CoinDesk’s product team. The opinions expressed in this article are the author’s own.
The following article originally appeared in Institutional Crypto by CoinDesk, a free newsletter for institutional investors interested in cryptoassets, with news and views on crypto infrastructure delivered every Tuesday. Sign up here.
There’s a scene in Pixar’s "A Bug’s Life" (a very underrated movie) where Hopper (the evil grasshopper) clocks his whiny brother with a seed. And then another. Neither really hurt, obviously. He then opens the valve to the large seed granary, and ouch.
The point Hopper was successfully making was that size and might do not necessarily equal power. That lies with the seeds, I mean the masses. Volume trumps influence.
We hear so much about “institutional influence” in the crypto markets that it’s easy to fall into the trap of thinking that institutions alone will decide when the next bull run will start. The “wall of institutional money” that most of us were breathlessly expecting in early 2018 was supposed to push the price of bitcoin and other assets “to the moon,” and savvy retail investors would tag along for the joyous ride (in a lambo).
A year later, we no longer talk about the “wall,” instead we are focusing on the infrastructure building and waiting for large incumbents to loudly declare their allegiance. Now we’re repeatedly told that “when Goldman/State Street/BNY start offering crypto services,” institutions will pile in.
A year later, we’re still missing the point.
Bridging the gap
Here’s the thing: “institutions” are not stand-alone entities that operate in a separate microcosm from the rest of the economy. Most hold retail money: the vast majority of institutional assets under management are held by pension funds, mutual funds and insurance companies. They are not going to make investment decisions without some assurance that their clients will be ok with this.
There are exceptions, true. Hedge funds, family offices and endowments cater to different constituencies. They can take more risk, often have a more innovative base and aren’t subject to the same rules and restrictions. But – sizeable as they may be – they are a small percentage of global wealth.
And they are, to varying degrees, already investing in cryptoassets. A survey earlier this month by Fidelity Investments and Greenwich Associates showed that over 20% of institutional investors already have some exposure. Another survey published last month by Global Custodian and BitGo revealed that 94% of endowments had already invested in the asset class. Grayscale Investment’s Q1 report released a couple of weeks ago showed a strong increase in family office participation.
The vast bulk of institutional money, however, is still waiting, and it’s not for an announcement from Goldman Sachs or its peers (although that wouldn’t hurt sector confidence). It’s not for a more comprehensive build-out of market infrastructure (although that is helping). It’s not even for regulatory clarity (although that would also be very good news).
It’s for mainstream retail interest to kick into gear.
When the clients of pension funds, investment advisors, mutual funds and the like ask about crypto assets, then a broader base of institutional investors will scramble to get informed. When the chatter about the concept in the respective investor communities grows to a volume that can’t be ignored, then even more large intermediaries will roll out new services.
Many smart institutions are getting ahead of the curve and positioning themselves with services that can satisfy the inbound interest. These early leaders are earning valuable experience and mindshare (not to mention revenue), as well as adding layers of professionalism and reassurance to the new markets.
Nevertheless, crypto is still far away from “mainstream.” To us in the sector it may seem like a flood of new infrastructure entrants over the past year has lifted awareness, interest from all sectors is growing strongly, and the regulators have not been sitting idle.
Yet crypto is, looking in from the outside, still very niche – total crypto market cap is miniscule compared to other investable assets, and for many, buying crypto is too complicated to bother with.
Crypto is also still seen as risky. Scams and hacks still weaken its reputation, it is still tough for crypto businesses to get solid banking relationships, and the tax situation in most jurisdictions is just plain confusing.
A glance at some recent headlines shows that is starting to change.
TD Ameritrade, one of the largest retail brokers in the world, is planning on offering crypto trading to its almost 12 million clients via institutional-grade exchange ErisX, in which it has taken a stake. On stage at Consensus earlier this month, executive vice president Steve Quirk recounted the “off the chart” interest in their crypto education series. According to reports, online retail broker eTrade is also planning to offer crypto trading to its almost 5 million clients.
The growth in the retail crypto audience goes beyond trading opportunities. Crypto assets and their virtues are being dangled in front of millions of retail investors with a series of media pushes. Last week, CBS’s news broadcast “60 Minutes” ran a segment on bitcoin. Earlier this month, asset manager Grayscale Investments revealed a stirring TV spot urging investors to “drop gold.” And since early this year, striking ads by institutional exchange Gemini, plastered on buses, taxis, billboards, bus stops and train stations in major cities across the US, announced that “crypto” is not the Wild West it once was.
Retail interest momentum seems to be building, but the “tipping point,” in which it is loud enough to get a broader swathe of the institutional sector to start investing in crypto (which in turn will encourage other institutional investors to join in), may be a way off yet. Or it may be just around the corner. The tipping point may be something as obvious as a bitcoin ETF launch, or it may simply be a cumulation of subliminal indications.
Meanwhile, rather than treat the two pools of demand as separate, those of us focusing on institutional interest need to keep an eye on retail developments.
Up we go
But just as the institutional sector needs retail interest to trigger a deeper commitment, so does the retail sector need the institutional channels. Without the support and oversight of institutional partners such as trusted advisors, familiar brokers, mutual fund managers and pension fund allocators, most retail investors will probably not feel comfortable enough to take the plunge on their own.
Retail investors may be increasingly noticing and digging into cryptocurrencies – but for this interest to hit scale, they need institutional support.
At the end of A Bug’s Life, Heimlich the plump caterpillar undergoes a cheerful metamorphosis and emerges with colourful wings that are unfortunately too small to carry his considerable heft. He can’t use these new tools effectively by himself. Not to worry – his airborne teammates have a lot of experience with the new infrastructure. They help him to soar over the landscape.
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