Institutional Money to Drive a Second Crypto Boom
Last year was a wild ride for the cryptocurrency markets. We saw Bitcoin go mainstream and become a household name. We watched Ethereum make its ascent to the top and become the second largest cryptocurrency, making huge gains in the process. We witnessed many other coins use Ethereum to create their ERC20 tokens, and we saw a bunch of startups raise funds through ICOs.
However, after the eventful 2017, we also saw the market crash again throughout the first quarter. While it wasn’t the first time the cryptocurrency markets plummeted and showed their extreme volatility, there was a lot more money and people in the game this time around. The overall cryptocurrency market cap peaked at $800 billion before the selloff brought the level back around $300 billion.
Many new crypto investors got caught in the mania and ended up losing money in this last downturn, swearing off cryptocurrency in the process. But we know that blockchain technology has incredible potential, and the crypto markets are highly volatile. And it turns out institutional money knows that, too.
We’re expecting to see a wave of institutional funds start flowing into cryptocurrencies throughout the latter part of the year as they jump on the bandwagon.
Institutional money is set to pour in
Individual investors had the potential to make a killing in cryptocurrencies last year. Now with blockchain technology gaining more adoption and the crypto markets getting more mature, institutional money market funds are coming around and looking for opportunities in the industry.
Previous cryptocurrency skeptics like JPMorgan Chase CEO Jamie Dimon have now been quoted expressing regrets over any prior negative comments.
Institutional investors are ready to add cryptocurrency to their portfolios, here are some telling signs and evidence to support the next wave of money that’s expected to flow into the cryptocurrency markets.
Nasdaq CEO Adena Friedman expressed interest in the idea of becoming a platform or exchange for cryptocurrencies in the future. "Certainly Nasdaq would consider becoming a crypto exchange over time. If we do look at it and say 'it's time, people are ready for a more regulated market,' for something that provides a fair experience for investors."
Nasdaq is waiting for more clarity on the regulatory side of things, but in the meantime, they are supporting cryptocurrency exchanges. They announced a partnership with popular U.S.-based cryptocurrency exchange Gemini, which allows the crypto exchange to use Nasdaq’s technology to monitor their platform for nefarious or abnormal activity. Gemini CEO Tyler Winklevoss plans to leverage the partnership to provide a fair and rules-based marketplace for cryptocurrency traders.
Venture capital expansion
Coindesk reports on the monthly venture capital funding totals for blockchain and cryptocurrency startups, and the trend has started to pick up at the beginning of the year. February saw $150 million of venture capital funding, and the pace is expected to quicken as we progress towards the latter half of the year.
Venrock Associates, a venture capital firm that was born from the Rockefeller group, is taking a venture capital approach with blockchain and cryptocurrency startups, along with investing in coins and tokens. The firm is looking to get in on the ground floor, sort of a pre-ICO move, to get equity stakes in the companies behind these cryptocurrency projects.
Venrock has a strong history of success with technology capital investments. It made early plays on Apple (leading its first venture round) and Intel (investing before the chipmaker became an industry leader). The latest fund totals $450 million and plans to make cryptocurrency and blockchain startups one of its primary focus areas. Venrock has dedicated a four-person team to working on their cryptocurrency investments.
Goldman Sachs has been one of the forward-thinking financial institutions, clearing CME and Cboe futures when the products launched last December, along with rumors of launching a trading desk.
Goldman is getting more serious about the various ways to allow clients to invest and participate in cryptocurrencies. Their most recent move was the strategic hire of a former quantitative trader at Seven Eight Capital Justin Schmidt to lead up the digital asset markets in Goldman’s securities division.
This hire gives another signal of a major financial institution setting the stage to make a big splash in cryptocurrencies at some point this year. It also gives some support for all those crypto trading desk rumors.
George Soros is another notable large investor that seems to be eating their words about cryptocurrency. In January, Soros referred to cryptocurrencies as a bubble. And that inflated market did snap back over the past few months. But now his $26 billion family office is planning to trade crypto assets.
In the past few months, the macro investing arm of the Soros fund received approval to trade cryptocurrency. They have yet to invest but plan to launch crypto trading and represent a huge fund that could take sizable investment chunks at a time.
Why institutional money wants in
The volatility and overall growth of the cryptocurrency markets and blockchain technology have sparked interest in anyone who manages money. Digital and virtual assets present a new and emerging asset class to diversify portfolios and provide an incredible amount of upside potential.
When financial institutions see the crypto markets, they see the volatility as a huge opportunity.
In response, hedge funds have started sprouting up. There are supposedly over two hundred hedge funds focused on cryptocurrencies. Blocktower Capital is one of the more prominent, after quickly raising $140 million in 2017. Their latest stunt involves pulling former executives from the above mentioned Goldman Sachs to help build their crypto funds.
Fund manager John Burbank, and Passport Capital, which he started in January, plan to raise $150 million for two funds to invest in cryptocurrencies, targeting family offices and wealthy investors to raise the capital. Hedge funds are one of the routes taking advantage of the demand for crypto investment from the institutional capital.
For the most part, institutional investors have had to sit on the sidelines and watch while individuals take advantage of the huge opportunities in the crypto markets. Many have come out and spoken against Bitcoin and cryptocurrency in the past, and are now eager about the potential of blockchain and actively trying to find investment opportunities.
The primary hurdle to jump before institutional investors start implementing crypto business models is the regulatory aspect. Most are waiting for more certainty from the U.S. on the legislative end before making any big moves. States like Wyoming are also responding and putting pressure on Congress by passing their laws about cryptocurrency. The expectation is that the U.S. government will provide more clarity on crypto regulation throughout the year.
In the meantime, there is plenty of evidence that institutional investors are preparing themselves and getting ready to enter the crypto markets. That should provide a lot of new capital flowing in and gives individuals opportunity now to make their investments before the wave of institutional money. A lot of successful investors are eyeing this as the perfect time to add cryptocurrency investments, after the last dip and before this new investing wave.