In a June 2020 survey by Fidelity Digital, more than one-third of institutional investors in Europe and the U.S. reported holding digital assets. But traditional financial behemoths don’t exactly seem to be stampeding into the cryptocurrency space – so what gives? Will institutions’ slow entry into digital assets mean that advisors will have to wait longer to access this asset class?
Many of the largest institutional holders of cryptocurrency come from outside of the traditional financial world. Two corporations, MicroStrategy and Tesla, boast enormous crypto holdings. As of June 21, MicroStrategy had over 105,085 bitcoins, which at the time were valued at $2.7 billion, while Tesla’s second quarter bitcoin holdings were reported at over $1.3 billion. Former hedge fund manager Michael Novogratz’s Galaxy Digital Holdings owns over $500 million worth of bitcoin alone, while crypto brokerage Voyager Digital has nearly $400 million in bitcoin itself.
Other major non-traditional buyers include Square, the Jack Dorsey-led commercial payments platform; Marathon Digital Holdings, a bitcoin miner; and crypto exchange Coinbase.
But traditional institutions may not be far from diving into the digital assets space, said John Sarson, a founder of crypto asset manager Sarson Funds. They’re attracted to cryptocurrencies for their promise as a hedging and diversification strategy, their potential for use in market-neutral strategies and as an alternative investment strategy.
“It looks to me like there’s going to be an institutional stampede into the cryptocurrency space,” Sarson said. “Once they start going, they don’t stop. I haven’t heard of any institutions that bought into cryptocurrency on the way up that are selling, because nothing has happened to make them want to sell.”
What could institutional adoption mean?
Large financial institutions entering into the cryptocurrency space en masse could lead to thousands of more investors and billions of additional dollars following. This would have a long-term positive impact on the underlying value of those assets.
That’s because a cryptocurrency’s value comes from the size of the underlying network supporting it, not from the independent price action of its tokens in the marketplace, said Sarson Funds co-founder Jahon Jamali. A token like bitcoin or ether becomes more valuable with each node, or junction of connections, or participant because it signifies the continued growth of a network.
A good example is the internet. In its early stages, linked computers and dial-up connections could share information via a shared protocol, but the low numbers of participants meant the value of having a computer with a modem was relatively low for most users.
In my first encounters with the internet, in elementary school in the mid-80s, the only place we could reach with our 300bps dial-up modem was NASA. A few years later, companies like America Online, Prodigy and Compuserve were bringing millions of Americans online, and the value of being able to dial into another computer grew exponentially.
Jamali said that it will be much the same with cryptocurrency.
“They [cryptocurrencies] aren’t a stock,” he said. “What we’re witnessing is more like the growth of the internet, or the expansion of telecommunications.”
Still, much media attention is spent on price action. In April, Bitcoin achieved an all-time high price at nearly $65,000 before tumbling by more than 50% in subsequent months amid a Chinese crackdown on crypto mining, trading and banking, and increased scrutiny by regulators, elected officials and the media around bitcoin’s environmental impacts, volatility and security.
But a run-up in the value of tokens like bitcoin could create thousands of clients newly eligible for an advisor’s services. These clients will need help managing and diversifying their growing holdings and muting the potential tax impacts of greatly appreciated assets.
But where are the institutions?
That’s partially because institutions are moving slowly into the crypto space, if at all, said Sarson.
“I called an Australian pension fund with $200 billion in holdings because they wanted to know more about cryptocurrency, and I asked what their timeline was like,” said Sarson. “They were like ‘Well, we’ll do research into that asset category and whether or not we want to invest this quarter, or maybe into the summer. Then we’ll do a presentation to our board, and then we’ll decide whether to invest. If we do decide to invest, we’ll study if we want to do it ourselves or hire managers, which takes a quarter. Then we’ll conduct another study to evaluate managers.’ It will be at least two years before they invest – but at least the ball is rolling.”
Sarson pointed out that State Street’s creation of a 450-person-strong digital assets unit shows that even institutional behemoths – notoriously slow for implementing new assets, techniques and technology – are starting to take the crypto space seriously.
BNY Mellon also recently revealed plans to potentially enter the crypto custody business via a partnership with Grayscale. (Disclosure: Grayscale is owned by Digital Currency Group, the parent company of CoinDesk.)
“What I’m hearing from our clients is that they’re all trying to understand this [space] and learn and figure out how they want to be a part of it,” said Ram Nagappan, chief information officer at BNY Mellon Pershing. “On our side, we’re trying to get the infrastructure and chassis to handle these assets in place.”
“This is not going to go away,” he continued. “When you have so many institutions, regulators and laws coming to bear, it can’t just go away; it will just be reshaped into a more acceptable format for all of the folks still on the sidelines.”
Other methods, other influencers
There are also new methods coming to market for advisors to access crypto – most notably, ProFunds’ recent launch of a bitcoin mutual fund that will invest in futures contracts instead of in the token itself. These innovations will allow more Western institutions to hold cryptocurrencies through channels familiar and comfortable to them.
While a U.S.-domiciled crypto and bitcoin ETF still awaits a nod from the U.S. Securities and Exchange Commission, institutional investors can also now access the space via Canadian and European exchange-traded products.
Even Capital Group, a conservative asset management stalwart, is getting into cryptocurrency, by acquiring a large position in MicroStrategy, a firm whose stock is now widely viewed as an analog for bitcoin itself, Sarson noted. At the beginning of the year, MicroStrategy CEO Michael Saylor announced plans to invest his company’s cash reserves in bitcoin. Today, MicroStrategy holds more than $3 billion worth of bitcoin.
And as firms like Fidelity, Morgan Stanley, Goldman Sachs, JP Morgan and BlackRock have announced or expanded their digital asset efforts in recent months, this growth in institutional interest makes it likelier that a round of big institutional money will be entering the cryptocurrency space in the months to come. Each of these new participants will be designing products and exchanges that will bring new investors, and, at last, a greater community of financial advisors and their clients into cryptocurrencies.
“There really hasn’t been broad-scale adoption yet where everyone is going all-in to cryptocurrencies,” said Lisa Burns, head of platform technology at Fidelity Institutional. “More and more, though, we’re seeing an accelerating increase in interest, and thus as a company, we’re investing very heavily into it.”