The digital asset community is working hard to build out market infrastructure for institutional investors, there’s no denying that. At Consensus: Invest in New York, one of the world’s largest cryptocurrency conferences for professional investors, it was talked about non-stop, whether it was on stage, in meetings and I think I even heard it brought up at the coat check-in.
Even at a time where you would think the most glaringly-obvious conversation topic would be the falling price – Bitcoin was around $3,500 at the time of the event – institutional involvement remained at the top of the agenda. This was blended with talk of regulation, custody and new product launches.
There’s some truly exciting stuff going on in the digital asset world, but despite all the bullishness around greater involvement from traditional financial players, the conversations have followed a similar pattern throughout 2018, without too many indications of interest outside of the mass launches of platforms and services.
That opinion would have been more out of place at the event than the suit and tie I wore among a sea of hoodies and branded gilets, but until there’s more regulatory clarity, custody and all-round familiar plumbing in place, it’s going to be more of the same going forward.
Here are my top takeaways from the event.
It’s starting to feel a bit more familiar…
A conference which kicks off with the CEO of the largest exchange group in the world on stage discussing cryptocurrency is one to pay attention to. Jeffrey Sprecher is known for his purchase of the New York Stock Exchange, but the serial entrepreneur has now thrown his hat into the crypto ring with the launch of Bakkt, and he’s a man with a plan.
Sprecher and Bakkt’s CEO Kelly Loeffler have made their intentions clear – provide a regulated institutional price discovery contract that people can have confidence in. The one-day physically delivered Bitcoin contract with physical warehousing Bakkt has planned will feel far more familiar to institutional investors with the presence of a clearing house, an established name and regulated price discovery.
The regulatory voice at the conference called for custody solutions and manipulation-free prices, along with exchange rules and surveillance. Sprecher highlighted the AML, safeguards and infrastructure that traditional financial exchanges have that don’t exist in crypto’s OTC arenas. On the future of crypto, Sprecher commented “Will digital assets survive? I’d say the unequivocal answer is yes.”
The price drop didn’t ruin anyone’s day
The drop in prices of cryptocurrencies across the board was unavoidable at the event, but most diminished its importance in relation to expanding the digital asset universe. “Right now we don’t care if it is at $3,000 or $2,000, they [institutional investors] want the market infrastructure in the right place,” said VanEck’s director, digital asset strategy, Gabor Gurbacs. Did ICE’s Sprecher care about the price drop on the morning of the conference? Not one iota. “You said a number as if that is the price,” said Sprecher in response to the moderators unveiling of Bitcoin’s drop that morning. “I don’t know whether that price was manipulated or not.”
While the current price didn’t seem to bother speakers, the ability to price cryptocurrency going forward was a hot topic: “Price is always important,” said one speaker. “The reality is getting the middle- and back-office and the risk, and the tax exposure of this; if you’re a pension or endowment how do you value this as a risk asset. All these facets of institutional investing need to be answered.”
The Bitcoin ETF stalemate between issuers and regulators rumbles on with the chair of the Securities and Exchange Commission stating at the conference that custody and price manipulation concerns are the two factors holding an approval of the product. This didn’t go down too well with Van Eck Securities’ president & chief executive officer, Jan van Eck, who voiced his frustration during a panel just after the SEC’s Jay Clayton was on stage.
“We’re doing our best,” he said. “The two concerns of custody and pricing, I think we’ve made a lot of progress on the pricing front. Getting that previously dark part of the ecosystem into the light is important.
“How do you define what market manipulation is? I’m not sure that’s really been defined by the SEC. It’s not a great line test they are giving to us.
“You are afraid the finish line moves further away from the you closer you get.”
The impression from Clayton was that these issues were close enough to being solved to give optimism on an impending approval for Bitcoin ETFs. Unfortunately, this means speculation will continue well into 2019.
Widely-respected market commentator JJ Kinahan, chief market strategist of TD Ameritrade. highlighted the difference between the start and the beginning of the year through the number of Bitcoin applications his firm was receiving. From 50 to 100 every week in February, he said that as “things got more boring” a month ago, it fell to around 10 per week. But with volatility coming back into cryptocurrency we could see an uptick in volumes and activity across the board. “I would expect volatility in Bitcoin to continue at least for the next few months and that in my opinion will be a good thing for volumes,” he said.
Cboe’s director, markets, global head of cryptocurrencies, John Tornatore, echoed his comments, saying that he believed crypto was back on the agenda after falling out of mainstream popularity throughout the summer.
“Crypto fell out of the mainstream news, it fell out of everyone’s day-to-day lives,” he said. “If the underlying isn’t moving then there’s not going to be much volume. Go back to last week, we had some fantastic days of trading.”
A new derivatives launch
“This will be the partnership of the year” said VanEck’s director, digital asset strategy, Gabor Gurbacs, when announcing their work with Nasdaq to launch a new Bitcoin futures contract. Someone obviously missed the royal wedding. But even if the VanEck and Nasdaq relationship doesn’t rival Meghan and Harry, it’s an interesting development as another futures contract lands in the market. Launching as early as the beginning of 2019, Gurbacs said they intend to bring a “regulated crypto 2.0 futures-type contract”.
Lack of patience
The future of cryptocurrency trading is a bright one, but it doesn’t happen overnight. The year has been full of ‘why hasn’t the ETF been approved?’ or ‘why isn’t institutional money entering the space?’ which shows real impatience. A lot has happened in the past 12 months, just look at the amount of new entrants in the space, the likes of Fidelity and other custodians entering the fray and derivatives launched across CME, Cboe and soon-to-be Nasdaq.
Are predictions starting to lose their credibility?
Next year will be the year of [insert bullish claim here]. In place of the surging price claims of late 2017 and early 2018, we’ve now got timeline predictions about widespread institutional involvement in digital assets. Ultimately there’s too many variables to really put stock in these estimations. Just keep plugging away, solving the regulatory, custody and infrastructure issues and then if everything people are saying about demand is true, then the world will open up to institutional investors.
Panellists speak their mind
I’ll leave you with a few quotes I found particularly interesting from an event where people weren’t afraid to speak their minds. Thanks for reading.
“My team spends more than 50% of its time doing educations work. Talking to institutions, endowments, pensions. These are institutions that are looking for new ways to diversify their exposure. We’ve seen investors start to rotate out of things like gold and into things like Bitcoin.”
Michael Sonnenshein, Managing director, Grayscale Investments
“Bitcoin are bearer assets, it’s like cash in your wallet, if its gone its gone. Custody is part of an overall integrated ecosystem. Custody is the most foundational and important aspect.”
Justin Schmidt, VP, head of digital asset markets, Goldman Sachs
“Institutions want to invest in crypto the same way they invest in their other asset classes. You can look out and see on the horizon, that institutions can come onboard and manage this asset class the way the manage their other asset classes.”
Bart Smith, head of digital asset & co-head of the ETF Group, Susquehanna International Group (SIG)
“2019 we will see some interesting positive exchanges. Each one of those institutional offerings will lead to one or two more. 2019 will be the year of the on-switch.
Mike Belshe, co-founder & chief executive officer, BitGo
“As the institutional players start to engage more in the crypto markets you will start to see the big money flowing in.”
John Tornatore, director, markets, and global head of cryptocurrencies, Cboe Global Markets
“If you’re buying your equity through Fidelity, if you are buying your fixed income through Fidelity, then why not buy your digital assets through Fidelity.”
Terrence Dempsey, product development, Fidelity Digital Assets
“The desire for this to become an asset class and investment managers to put money into this is still there. But let’s recognise that the size of crypto as an overall market cap is small. So it’s not large enough for some of the big managers coming in,”
Hu Liang, founder and chief executive officer, Omniex