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. B
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.
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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?
Even with lower bitcoin prices, however, institutions haven’t been in a rush to invest. A June 30 story by CoinDesk’s Lyllah Ledesma noted stagnation in the balance of bitcoins held on certain exchanges and a decline in the number of bitcoin “whale” accounts, or those with more than 1,000 BTC.
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…
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