by Nick Ayton
In 2018, investment banks have started to acquire crypto infrastructure assets, most notably Goldman Sachs supporting Circle to acquire Poloniex the crypto exchange for $400m, where exchanges are deemed the most value assets in this new market.
The large investment banks Morgan Stanley, Goldman Sachs and JP Morgan, after some anti Bitcoin rhetoric during 2017, have invested and established crypto trading desks, with other ex bankers jumping ship to set up a range of crypto related businesses. And not confined just to the US banks, it is happening in all regions. This is delivering a massive signal. Institutional capital is taking our new market very seriously, joined by BNP who have backed a crypto fund, Barclays have banked Coinbase in London and they are joined by Fidelity and BlackRock who are preparing to offer crypto custody and insurances to support a new range of financial products that are on the short term horizon, such as ETFs and some derivative options.
There is belief that the next chapter in this story will be the rise of Asset Backed Securities (Security Tokens) and 2019 will be the year of building infrastructure to support what some predict will be a multi trillion market, much of which will be soon acquired by the old guard capital markets players in what they perceive as ‘defence against the dark arts’ whereas the crypto community see them as Satan’s helpers.
With Coinbase already reaching valuations of $8 billion, and possibly about to become the first Unicorn alongside Ripple XRP although in my book fails to qualify as a true Blockchain and cryptocurrency, our industry is developing nicely. Although crypto businesses will no doubt attract crazy DotCom valuations, there are other projects building crypto infrastructure such as tZero have attracted $260m investments that given the time it will take to scale the security token market, it will be a long time until it delivers for investors, and there is our own exchanges crix.io built in 2014 and recently approved in Malta to initial trade crypto before being granted a MiFID licence to handle Security tokens.
The fear of missing out could drive the arrival of institutional capital, and yes we do want it to flow, but we want them to buy products and not necessarily acquire all the underlying infrastructure assets. But, with few options for exit strategies other than buying into crypto funds, exchanges provide the secondary trading market option private capital demand to support their moves into alternate asset strategies. As we wait for the announcement of the first ETFs to be licensed in various jurisdictions that will help provide confidence in an exchange tradable product whose construct helps smooth some of the volatility, this will be seen as a familiar product and something to buy that meets the needs of first movers.
Traditional capital markets now see the opportunity and want to hedge their future by offering new services to support an asset backed security market that some say will exceed traditional markets within a decade, and emerge into a multi trillion market as soon as 2023. Initially institutional capital have been cautious not to have their fiat currency in the same currency pools as crypto which is kind of odd, given reportedly some 30% of fiat supply comes from unidentified sources, but we need institutional capital to flow freely and why regulatory wrappers, full due diligence and KYC/AML will further build confidence.
The investment banks continue to stock pile Bitcoin for themselves and HNW clients, they have set up OTC trading desks handling three times the volume of crypto exchanges, whilst asset managers Fidelity and BlackRock amongst them understand the need for custody and how to manage counterpart risks with products that support both fiat and crypto custody, investing Cold Store solutions and an understanding of Key Management and linking APIs for treasury, payment and Hot Wallets that add another layer of confidence for new old capital. Banks are slowly banking crypto businesses including exchanges as we exit 2018, the signs are that 2019 will be a pivotal year for our crypto community, laying the foundations for another giant step in maturity.
Of course the Libertarian in me remains sad that we are forced to follow a current capital markets that is dysfunctional, a regulatory landscape that was asleep at the wheel at the last financial crisis (but has been significantly reformed in the last 10 years) and a Fractional Reserve banking system that in so many ways may not deliver for the people, for smaller businesses and smaller nation states.
Is it right the crowd have been squeezed from the pitch? A response to the madness of ICO markets fuelled by ALT coin profits, but how many people actually lost anything other than house money? It wasn’t until VC and institutional money was lost, who should have known better in my view, did regulators enter from left field, and where other sovereign states simply banned crypto activities completely to reduce capital flight they cannot control. Whilst the likes of Korea and China have produced the bulk of success stories in this market, it all seems a bit weird from my perspective.
There is no doubt Bitcoin remains great value as of writing this, it is the only ‘hard’ currency we have and a reliable long term store of value that requires mass adoption to smooth volatility and should it remain relatively flat for a part of 2019 until the scarcity and ‘the halving’ will support good progress to new highs. Given fiat’s possible demise and the mountain of debt in the US, it may not be long until the next financial crisis hits.
The signals are everywhere and institutional money is being deployed which will be a bigger signal for private wealth from Family Offices to enter the market. Because everyone knows the system is broken, and not one fiat currency in over 600 years has survived. Old wealth is fully aware their future will rely on a new financial system that offers better liquidity for once illiquid assets (land, property, rare assets) the bastion of private wealth for centuries. Family Wealth see crypto as part of the answer and many have 1% or 2% of their portfolio in a range of alternate asset classes including Blockchain projects, crypto funds and some have dare I say bought tokens from ICOs, now probably zombied in some way. As this is all part of learning and coming to terms with a new industry; an industry that will mature very fast and scale in a way we have not yet seen as the world starts to tokenise all assets, products and services because it is more efficient to do so for everyone concerned.
“Ignorance is Tested” ICOs are dead, STOs will focus on retail options and Prospectus Laws and exchanges and secondary markets will support a vast new range of asset classes as Asset Backed Securities.