My interest in this topic comes from having worked in the institutional investment management space for many years. Unfortunately, so much of what I read about 'institutional adoption' just hasn't passed the sniff test. In this article, I'll share why that is.
Everywhere we turn we hear about the upcoming explosion of institutions on the verge of embracing Bitcoin. Like you, I've also read and got excited about famous hedge fund managers such as Point 72 and Soros moving into the space. I then remembered that both of these are practically family offices at this point with very few people to answer to other than their two family heads. I definitely took notice when Ray Dalio admitted to owning some as I've actually met the man a couple of times as I worked for one of Bridgewater's larger clients for years. I've also read about Goldman, Morgan Stanley, JP Morgan, BoA, and other large investment banks starting crypto trading desks and racing to offer various crypto related vehicles to their HNW clients.
With all of this momentum, we must be on the verge of something really big, right? My answer is a highly cautious yes. We may fly through some turbulence to get there though. In terms of institutional adoption, I believe we are still in the 1st inning of the game. That means there could be a tremendous amount of upside to come. How did I get to a first inning diagnosis for adoption?
- As noted above, I was in the institutional space for a long time and still have quite a few relationships in it. This is very non-scientific, but I called about 10 different hedge funds I know around the US and asked them if they were looking at crypto. Some of these are big time hedge funds with tens of billions of AUM that even the most casual investor will be aware of and some of them were smaller, off the radar types with only a few hundred million in AUM. Of the 10 inquiries, one had dabbled but shut it down. Why? As non-crypto oriented hedge funds that take full discretion over their clients funds, they couldn't handle the fiduciary risk that comes with managing other people's money. There are definitely some crypto specialists hedge funds operating out there but by definition, they are the ones pushing the boundaries from a regulatory perspective. That is to say, its a new space that regulations haven't caught up with yet. You have early adopters on both ends meeting each other, fully knowing what they are getting into.
I also called an extremely large global asset manager that manages a couple hundred billion dollars in institutional money with offices around the world and asked the same question. He literally laughed and said he couldn't imagine them getting into for the same reason: Fiduciary concerns. What about the investment banks and HNW clients? Most of these are happening through brokerage operations that don't come with a fiduciary standard by the bank. It's an entirely different regulatory construct with a much lower litmus test.
- I found a list online of the top public companies and top private companies that hold BTC. Before I go any farther, I don't know how up to date or how accurate this list is. I'll leave a link to the website but below I am pasting an excel spreadsheet I created from it. My big take aways? As you'll see from the list, there actually aren't very many non-crypto focused firms that have added BTC to their treasury holdings. That goes for both public and private firms. Looking at the full lists, the majority of the publicly trading companies are actual crypto industry participants in some meaningful fashion. There were also two countries on the list which I included to give a sense of scale. Didn't see El Salvador which made me wonder how up to date the list is.
In summary, I could certainly be wrong but before mass institutional adoption comes, I really believe most institutional investors that operate under a fiduciary standard will have to get more comfort on the regulatory front. Why? Because there are thousands of lawyers waiting in the wings that would love nothing more than to land a big class action case and litigate it in the public eye.
So if we are so early in terms of institutional adoption, why am I cautious? I also believe we are in the 1st inning of what I am calling the "Big Sovereign Pushback". By that I mean a coordinated effort by countries and financial regulators to preserve the existing monetary/banking system and the power hierarchy that comes with it. The problem with being so early in this institutional adoption journey is that the cat is not out of the bag yet and the regulators can exert focused efforts to nip this in the bud if they want to. Do they want to? I sincerely hope I'm wrong but it sure seems like storm clouds are gathering. Exhibit A: CBDC's Exhibit B: Binance Exhibit C: US Congressional hearings and Presidential Working Group focus on stable coins. Exhibit D: UK banks cutting the chord due to UK regulator guidance Exhibit E: Alabama, Texas, New Jersey issuing cease and desist orders for a popular defi lending operator.
At the end of the day, I'm still a big crypto fan and sincerely believe the future is bright. I'm just skeptical that adoption is going to be as straight line as what I read about and think we should be prepared for turbulence should it come.