When it comes to the financial markets, how can an individual compete against the big institutional asset managers who dominate the markets?
These guys have trillions of dollars of assets under management, multi-million-dollar compensation packages for the world’s best traders and analysts, and massive budgets for technology and trading systems. And their relationships with investment banks usually give them first pick for a hot IPO and access to all the research that Wall Street has to offer.
It’s not often that individual investors get the upper hand on the big institutional asset managers. But there’s one frontier asset class where you truly hold the advantage over the bigger guys. And that’s in cryptocurrencies.
The Electron Global Fund was up 2% for September, bringing its third-quarter return to -1.7% and its year-to-date return to 8.5%. Meanwhile, the MSCI World Utilities Index was down 7.2% for September, 1.7% for the third quarter and 3.3% year to date. The S&P 500 was down 4.8% for September, up 0.2% for the third Read More
Let me explain.
Right now, the current total market capitalisation of the cryptocurrency space is approximately US$160 billion. (Bitcoin accounts for around 45 percent of the total, followed by Ethereum at around 20 percent.)
This is still extremely small when you consider that it’s the same size as the market capitalisation of the Walt Disney Corporation or Intel.
When it comes to other global financial asset markets, consider that the world’s total debt market is around US$215 trillion. And global equity market capitalisation is around US$80 trillion.
Cryptocurrencies going institutional
This month a friend of mine by the name of Lewis Fellas launched a cryptocurrency hedge fund. Anyone can launch a fund, but Lewis isn’t just anyone. He’s a world-class trader who’s worked for top U.S. investment banks, one of Asia’s most successful hedge funds, and, most recently, for the US$35 billion Harvard University endowment.
What I found particularly noteworthy, when talking with Lewis recently, was the amount of interest his fund has generated from institutional investors. After an article mentioned the launch of his firm, Bletchley Park Asset Management, appeared in Bloomberg, he told me he was “blown away” by the number of institutional inquiries he received… from sovereign wealth funds, endowments, funds of funds, family offices… you name it.
This tells me a few things.
First, there’s obviously a lot of interest in cryptocurrencies as a new financial asset class from big institutions. But right now there aren’t enough “bridges” between traditional asset managers and this new, less well-understood arena of cryptocurrencies.
People like Lewis create a credible “bridge” for these traditional asset managers to cross into the cryptocurrency realm.
Let’s say you’re the manager of a sovereign wealth fund, and you’re interested in making a small allocation to cryptocurrencies, how do you go about it? Do you build an internal team and do it yourself?
Or do you look for people with strong backgrounds in asset management, who have transitioned over to crypto, and who know how to responsibly invest other people’s money (i.e., institutional level security, compliance and reporting etc.)?
The latter, of course.
There are already a few cryptocurrency funds out there. Notables include MetaStable Capital, a San Francisco-based hedge fund and Polychain Capital run by 27-year old Olaf Carlson-Wee with US$200 million in assets under management. These funds however are usually backed mainly by big Silicon Valley venture capital names like Sequoia Capital and Andreessen Horowitz, not traditional institutional asset managers like pension funds for example.
The institutional level of participation in cryptocurrencies is still very, very small by any measure… but it’s increasing.
What does this mean?
This means there’s every likelihood that over the next year or so, we will see much greater sums of money flow into cryptocurrencies, and Bitcoin is likely to be the biggest beneficiary.
The advantage you have as an individual is that right now you have far fewer hurdles to overcome to put some money into cryptocurrencies than the big institutions.
A sovereign wealth fund or endowment manager that wants to buy cryptocurrencies needs to jump through a lot of hoops. There’s all sorts of compliance required, legal opinions, not to mention expanding the scope of your investment mandate (which defines what assets you can invest in) – which is no easy task.
But all you really need to do is open a cryptocurrency exchange account, and allocate a little bit of money towards bitcoin. You don’t have to put a lot of capital at risk either.
You have the opportunity to “front-run” a wall of institutional capital that will likely pour into cryptocurrencies as the asset class becomes increasingly mainstream, and increasingly difficult for asset managers to ignore.
If you want to start, check out our beginners guide to bitcoin… it’s here.