Five Signs That Institutional Investors Will Get Into Crypto in 2018
Mutual funds, pension plans, and endowments are gearing up to get into the crypto ecosystem, writes cryptocurrency venture capitalist, Eli Mizroch
Unlike individual investors and some hedge funds and venture capital firms, institutional investors have been sitting on the sidelines, waiting and watching to see where the digital currency economy will end up. But recently, as more and more mutual funds, pension plans, and endowments are gearing up to get into the crypto ecosystem, important players like Goldman Sachs are entering the market. Institutional investors are starting to experience the much cited, and derided, fear of missing out (FOMO) syndrome, normally associated with retail investors.
However, it is important for these players to enter the market sooner rather than later because when the dust settles, they will be severely underexposed, letting others profit.
While the dust has not yet entirely settled, we can already see five major trends that are giving shape to the emerging digital currency ecosystem.
1. Regulators are starting to get it. More and more major regulators are making active moves to understand, map out, and, eventually regulate this new market and asset class. Although there are still some regulators trying to squash all activities in the crypto space, our mapping highlights that most regulators understand the need for this market and its derivative benefits, such as new ways of raising capital, and are working to provide regulatory frameworks and guidelines to companies and investors eager to deal in these currencies and tokens. Recently, the US SEC has been spearheading this effort, striving to understand the fundamentals and economics of digital currencies, and making significant headway in rooting out fraudulent initial coin offerings and other practices. It is my strong belief that all (or at least most) regulation of this asset class is welcome, and is necessary if institutional investors are to enter significantly into this space.
2. New financial power centers are being established. As with all major changes in the financial sector, the rise of digital currencies and the potential shifts they herald to global markets, countries are vying to gain first-mover advantages and position themselves as the new financial hub and centers of the future. Switzerland, Japan (which alone accounts for around 50% of all trading in digital currencies), Singapore, Gibraltar, and, lately, Malta have each developed and approved regulatory environments encouraging the myriad of players in this new field, enticing them with regulatory protection, ease-of-doing-business, and attractive taxation rates. This competition is allowing the growth of more players, and, more importantly, affording these players the regulatory umbrella they need in serving institutional investors.
3. Trusted, solid service providers are emerging. The cryptocurrency economy relies on a number of financial service providers, most notably exchanges, custodians and prime brokers. The background, skills, and infrastructure of many of these providers have rightly been called into question. More recently, we have seen the emergence of what some are calling investor grade service providers, some of these reaching the required scale through mergers and acquisitions, most notably Boston-based broker and liquidity provider Circle Internet Financial Inc. acquiring cryptocurrency exchange Poloniex LLC for $400 million in February. I believe that these large, respected players will afford institutional investors the confidence they need in entering this space.
4. A more accessible asset class. The digital currency asset class has suffered from accessibility issues from the get-go. This is a young asset class, and the kinds of infrastructure and institutions that are necessary to operate this market do not fully exist yet, as a system. But we have noticed some important signs of forward movement. Futures can now be traded on major exchanges, important banks are entering the market—Goldman Sachs recently announced plans to open a trading desk for cryptocurrencies—and some major exchanges have launched accounts and platforms designed specifically for institutional investors. These improvements may make it much easier for institutional investors to transact in this field.
5. The ICO phenomenon is key. The huge shift—without the bulk of institutional investors playing a part—in investment preferences driving the flows of capital into technology companies has had a profound effect on the financial services market. I would venture that there are at least some investment bank CEOs out there getting frustrated about being left out of all these ICOs. In the first quarter of 2018 alone, ICOs have raised over $6 billion. This, in itself an astounding number, has proven a significant issue for investors and financial players alike. Many institutional investors were able to invest in technology through their investments in venture capital funds, or directly in initial public offerings underwritten by the major global investment banks. But because they are not in the ICO game yet, this ability has been significantly hurt by the emergence of the ICO phenomenon, as many venture capital funds are not actively investing in ICOs and the major global investment banks, except for Goldman Sachs, are completely out of the game. The pressure from institutional investors to ensure they are not pushed out of the technology capital investment game will result in most venture capital funds and investment bankers building capabilities in this field. This process will allow institutional investors, even if indirectly, to send large flows of capital to the blockchain based technology innovation sector.
I believe that 2018 will prove to be the year institutional investors enter the digital currency class in a significant way. As with all new asset classes, investments in infrastructure, skills and know-how, partnerships, and marketing are expected, and these take time as well as money. Some players, aware of the trends I have highlighted, have started making these investments, hoping to gain the all-important first-mover advantage in their market. Those that have yet to start, are in real danger of developing severe FOMO.
Eli Mizroch is CEO of Israel-based cryptocurrency investment firm Silver Castle Ltd.