Crypto and Institutional Adoption
I think the fear of missing out among retail investors at the end of 2017 and early 2018 was fuelled by the story that institutional adoption was around the corner. At that time it was the introduction of bitcoin futures by CBOE and CME that led to inflated expectations which drove bitcoin and altcoin prices to all time highs. We're almost a year further and instead of a big inflow of institutional money, we witnessed an outflow of money; the entire crypto market cap fell from a high of 820bn USD back to just a little over 100bn USD. Looking back, it is quite clear that retail investors were expecting too much of where the market was heading based one stories of institutional development. So, what happened? Did the narrative change? Was institutional adoption just a dream? Or do developments like these just require more time than anticipated by retail investors? Let's have a look at where we are with major institutional developments in the area of products and infrastructure in a series of articles of which the first one focusses on products.
One of the driving forces behind the rally for bitcoin at the end of 2017 was the introduction of bitcoin futures by both CME and CBOE. Both are cash settled instruments and the markets are currently trading a little below spot which is typical for a bear market. The January 24 launch date for BAKKT is cancelled due to the government shutdown. The Commodity Futures Trading Commission (CFTC) can't do anything for Bakkt until the shutdown ends. BAKKT (a new company launched by Intercontinental Exchange) intented to launch physically settled bitcoin futures. A major step forward because ICE already has approved relations with existing banks and brokers, ICE as a counterparty to the trades is in great financial condition (which is a prerequisite in terms of counterparty risk) and approval is only required by the CFTC which is said to be easier than getting approval from the SEC. The bitcoin futures on Bakkt will be settled for physical bitcoins on a daily basis, and will have a positive impact on demand in the spot markets, in contrast to the cash settled futures issued by CBOE and CME. The crypto community was excited since the physical bitcoin futures would be a great way of buying bitcoin, and this option would be available on major stock trading platforms, opening another gateway for institutional investment into bitcoin. The expectation is that once bitcoin futures are launched by BAKKT, other major crypto currencies would soon follow suit.
Crypto minded investors are in the meanwhile also waiting for approval of the bitcoin ETF by VanEck-SolidX. Tyler and Cameron Winklevoss have had two high-profile applications denied by the SEC so far, the most recent being rejected in July. The VanEck ETF proposal seperates itself from other proposals by its physical backing. The final deadline for approval by the SEC (Securities and Exchange Commission) is February 27th. Jake Chervinsky of Kobre and Kim wrote a nice thread on how the current government shutdown might affect the approval process.
But there are other ways to get exposure for institutional investors. Greyscale investments is mainly serving institutional investors with a closed end fund (CEF) type of solution. They offer multiple currencies but their "Bitcoin Investment Trust" is still of main interest and currently trading at a premium of around 20% to the Net Asset Value of the amount of bitcoin it represents. With a staggering amount of a little over 204.000 BTC, it holds more than 1% of the circulating bitcoin supply. Another one to watch is the Swedish company XBT provider, who is offering bitcoin ETN's since 2015 and these are listed on Nasdaq Stockholm. Because of its success it also started to offer an Ether ETN. In Switzerland, SIX (owner and manager of the Swiss stock exchange) hosted the worlds first crypto index ETP which offers exposure to the top 4 cryptocurrencies by market cap and trading of the product started late November.
An important aspect of developing new products going forward is the presence of borrowing markets. A great article on why financialization of crypto matters was written by Caitlin Long who clearly pointed out that history has proven that markets for borrowing money can become unanchored from the money itself and end up corrupting the money; first by creating substitutes for the real money, which are accepted as if they’re real, and then later by creating insidious mechanisms to inflate the quantity of those money substitutes so that some players gain something for nothing.
I think it's safe to say that we have witnessed a huge wave of product development, but as long as regulation is not set in stone, we are still in the early days. Once regulatory hurdles are taken, we can expect a whole lot more products as the interest is there and still seems to be increasing as indicated by net inflow of the products mentioned and the willingness to buy into those at a premium.
The next part of this series will focus on the most relevant initiatives that will help institutions to further embrace crypto. The most promising ones are expected to start offering their services in 2019, but more about that one in the next article.