Talk #2 Institutional Investments in the Crypto Space
How ready the cryptocurrency markets are for institutional investors is a popular question. Some would argue that institutions have already arrived while others believe the market will never be entirely suitable for the balance sheets of institutions. Four panelists who deal with institutional clients every day joined Mark Dudas, CEO and co-founder of The Block, for a discussion on institutional investment in crypto. This panel explored the outlook institutions have regarding the cryptocurrency market but also examined the infrastructure which is being built to change that outlook.
The panel brought together the following professionals: Mark Yusko (Morgan Creek Capital Management), Charlie Meraud (Woorton), David Fauchier (Cambrial Capital) and Andrew Robinson (Coinbase)
The discussion revealed several valuable insights into the state of institutional investment in cryptocurrency markets. Here’s a preview of some of the panel takeaways:
- How the word "blockchain" put venture capitalists to sleep
- What institutions are involved in the cryptocurrency market?
- Where are the pension funds?
- What approaches are institutions using to gain exposure to the cryptocurrency market?
- Cryptocurrencies as an asset class which provides diversification benefits to institutions
- Co-investing driving private institutional deals for cryptocurrency businesses
How the word "blockchain" put venture capitalists to sleep
David Fauchier shares a story of how the word blockchain resulted in a mass exit from a private equity and venture conference. The remaining attendees were either sleeping or on their smartphones. Is there a lack of serious conversation regarding how suitable blockchain projects are for institutional investment?
What institutions are involved in the cryptocurrency market?
The earliest institutional entrants to the cryptocurrency market include venture capitalists, proprietary funds, and global macro hedge funds. We are also seeing algorithmic traders and high-frequency trading firms enter the market to capitalize on the volatility. The different tiers of institutional investors are discussed along with how the market was initially driven by retail investors.
Where are the pension funds?
While the earliest entrants are taking positions in this market, large institutional investors such as pension funds have yet to take part. The infrastructure is still not established enough to meet the requirements of such investors.
What approaches are institutions using to gain exposure to the cryptocurrency market?
There are different avenues for institutions to gain exposure to the cryptocurrency markets. Direct exposure through owning cryptocurrencies is only one option. Other alternatives which may be more suitable to the needs of institutions include owning equity in businesses providing services in the industry, investing in funds, and owning infrastructure which may have importance to the industry. To date, real businesses with recognizable cash flows have been attractive routes for institutional investors.
Cryptocurrencies as an asset class which provides diversification benefits to institutions
Institutions seek to manage their risk exposure by diversifying their portfolio among uncorrelated assets. However, traditional asset classes are highly correlated, and these correlation figures are rising in some cases. To date, cryptocurrencies have had a low correlation with other asset class and a small allocation has drastically increased prospective returns while barely impacting volatility.
Co-investing driving private institutional deals for cryptocurrency businesses
Endowment funds for universities including Harvard have invested in specific cryptocurrency businesses and projects. These investments were largely driven through partners these funds were involved in. The investments were initially made by firms Harvard were invested in and the Harvard endowment fund co-invested in the deals. The same co-investing phenomenon is common among early-stage institutional investment in cryptocurrency projects with many of the early investors being familiar or linked with one another in some manner.
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