The “smart money” is finally entering the crypto space…
And that means we’re about to see massive sums of money flow into the sector.
Let me explain…
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Why the smart money has mostly stayed away from cryptos – so far
As we’ve written before, in the world of investing, “smart money” refers to professional investors who have more and better information than the general investing public. This includes hedge funds, large institutional investors and wealthy private investors. They have teams of analysts who do nothing but look for the best stocks and markets to buy.
Smart money tends to be the first to invest in “the next hot thing”… and the first to flee markets in anticipation of adverse conditions.
But with cryptocurrencies, the smart money has come late to the game.
You see, while there’s obviously been a lot of interest in cryptocurrencies as a new financial asset class from big institutions (it’s hard to ignore the massive gains we’ve seen in bitcoin and other cryptos), there are a lot of hurdles they must overcome to put some money into cryptocurrencies.
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.
And there haven’t been many “bridges” between traditional asset managers and this new, less well-understood arena of cryptocurrencies.
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? Unlikely.
Instead, you’d be looking 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.).
There are 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. But these funds 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.
So the institutional level of participation in cryptocurrencies has been very, very small by any measure… but it’s increasing.
Cryptocurrencies are finally going institutional
In recent months, we’ve seen several developments that will open up cryptos to the smart money…
For example, this month, bitcoin futures contracts started trading on some of the largest U.S. exchanges (the Chicago Mercantile Exchange and Chicago Board Options Exchange).
This gives a lot of institutional credibility to bitcoin as an asset class. And that really gives the green light to some of these bigger institutions who have been on the sidelines looking for some kind of validation of bitcoin.
Just take this recent quote from the CEO of Man Group. They’re a huge asset manager, nearly US$100 billion under management, and he simply came out and said, “Bitcoin and crypto, it’s not part of our investment universe today. If there’s a CME future, it will be.”
So that is a big sign that we’re going to see a lot of institutional money coming into this space.
Also, Coinbase, one of the largest crypto fiat exchanges, recently launched Coinbase Custody, which is a custodian service for institutional investors. Now, Gemini already has this. Coinbase is adding it. And clearly, this is targeted for institutions. Custody is, of course, one of the major issues that an institution needs to overcome in order to be able to buy bitcoin and enter the space. So having more custodian options for these institutions is a big plus.
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. Remember, bitcoin is the global crypto reserve currency. It’s the first crypto asset that tens of millions of people who enter the space after you will be buying.
And 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.