How Are Wall Street Investors Impacting the Crypto Market?
While crypto aficionados have long believed in this currency as a mainstream investment, those who were still doubtful need look no further for credibility than the rise of institutional investors in the crypto market.
Wall Street stalwarts are increasingly showing interest:
Goldman Sachs plans to introduce a “custody product” that will allow it to hold crypto on behalf of large clients, while it continues to consider plans to launch a cryptocurrency trading desk
Fidelity Investments now offers Bitcoin Exchange-Traded Notes (ETN) trading to its customers
Blackrock has formed a “working group” to determine how to capitalize on the crypto market.
Indeed, cryptocurrency is an emerging asset class that institutional investors, many of whom had previously been watching it warily, don’t want to miss out on. Here are some areas where their impact is being felt.
The Latest on Crypto Exchange Traded Funds (ETFs)
There’s no lack of interest in companies that want to develop a crypto exchange traded fund (ETF), since ETFs are one of the hottest type of investments today, says Investopedia. It describes an ETF as similar to a mutual fund in that it has a “basket” of assets, but trades on a stock exchange.
A cryptocurrency ETF, which would track a number of digital tokens, is regarded as a potentially more secure investment than directly buying cryptocurrency due to the extra layer of security it would add through the bank that supports it, as compared to relying on digital wallets which are vulnerable to hacks. And by tracking multiple tokens, ETFs diversify the risk, decreasing the likelihood of significant downward price spikes.
Despite a number of efforts to get approval for a crypto ETF, the United States Securities and Exchange Commission (SEC) has yet to approve a filing, pointing to a few issues which include a lack of liquidity and challenges in appropriate valuation.
However, while no ETFs have been approved to date, the XBT BTC ETN offered by Fidelity Investments is designed to offer another entry point for domestic institutional money into the cryptocurrency space.
And most prognosticators remain bullish, assuming it will only be a matter of time given all the interest.
"[A bitcoin ETF] is going to happen in the next year, I would actually make a bet on it," said Bill Barhydt, chief executive of bitcoin payment start-up Abra, to CNBC. "There is too much demand for it."
AI Price Tracking Tools Legitimize Crypto Prices
One thing is certain: Institutional investors live and die by data, which is why AI price tracking tools will continue to emerge as the market is further solidified. And crypto lends itself well to creating data-rich sets, from the information that can be mined from wallets and blockchain to the cacophony of social media chatter that can move markets.
“Providing trading insight to the cryptocurrency market is unique, as online communications and information flow are significant drivers of cryptocurrency values, in comparison to traditional financial services assets,” Thomson Reuters explained in a June news release announcing that it will track the top 100 cryptocurrencies. Its tools will include machine learning and natural language processing to measure “emotional and topical items” across news and social media sites that could impact cryptocurrency markets.
Other players include TokenTrax and Coindex, and recent reports also indicate that NASDAQ may soon launch its own crypto price prediction tool, as part of its Analytics Hub, which uses AI to better inform investment strategies by drawing on a wide variety of platforms for information.
As one source told CoinDesk, "There's the social media sentiment part, so applying machine learning and [natural language processing] will start with Twitter and might include StockTwits and then eventually perhaps Reddit.”
What’s Next: Looking Into the Crypto Crystal Ball
While insights into industry growth are largely anecdotal, examples abound of the rise of institutional growth. For example, Grayscale Investments, LLC, a digital currency asset management firm, reported in its inaugural Grayscale Digital Asset Investment Report that institutional investors represented more than half of the new investment dollars during the first half of 2018.
A survey of financial firm clients that Thomson Reuters released in April 2018 found that 20 percent of respondents said they were considering trading cryptocurrency over the subsequent three to 12 months.
Former hedge fund billionaire Mike Novogratz, who previously oversaw close to $9 billion in fund assets at Fortress Investment Group and founded the crypto-focused merchant bank Galaxy Digital LP, predicts a "herd of institutional investors" headed towards cryptocurrency.
“I think institutional investors are slowly coming to the realization that blockchain will be Internet or Web 3.0 and they'll want to participate just like they want to participate in the Web,” he told TheStreet.com.
And while Vice President and General Manager Adam White of Coinbase, an online platform for buying, selling, transferring and storing digital currency, remarked to CNBC that cryptocurrencies were largely driven by retail investors rather than institutions, he also noted that his firm started saw "unprecedented" interest from institutional investors throughout 2017. The "institutional conversations have become more and more profound," White said.
The bottom line? It’s not a question of if, but when, institutional investors will recognize cryptocurrency as one more attractive asset choice and further bring it into the mainstream.