[ M A R K E T
At the gates
While there is some confusion of
just what activity on the buy-side
is legitimate and what can be
safely dismissed as hearsay, what
shouldn’t be ignored is that institu-
tional money stands at the gates of
the future of cryptocurrency.
The issue is that those gates
remain closed, for the time being
at least, partly through a lack of
traditional infrastructure provided
by the largest financial services
providers for institutional inves-
tors, as well as unanswered ques-
tions regarding the safekeeping of
assets, liquidity, transparency and
valuation.
The well-documented links to
criminal activity and money laun-
dering also do the digital assets no
favours when attracting the most
heavily scrutinised parts of the
financial sector either.
“There is little participation from
institutional investors, but it is
liquid enough to trade,” says Peter
Kambolin, chief executive officer
at Systematic Alpha Management.
“Putting a value on where Bitcoin
is supposed to trade is difficult,
some people think it is zero and
others think it is worth one million
in the future.”
Despite the lingering worries, the
lure of this volatile new product
will be too much for the buy-side
to resist for much longer. One
hedge fund trader, who preferred
to remain anonymous, told The
TRADE: “At this point, we’d rather
be involved and stay small than not
be involved at all”.
Another source explains that
members of major buy-side firms
are instead using their expertise on
the side, by trading the unregulat-
ed markets on personal accounts
outside of their day jobs.
“The most interest right now is
from crypto-first investors, two
predominant groups – hedge funds
and family offices,” explains Sam
McIngvale, product lead at Coin-
base Custody.
“The next wave of institution-
al investors are pensions and
endowments, they are starting to
ask questions now, but they could
be six months away. Then at some
point in the future you will see the
more traditional asset managers –
an example in the US would be the
Vanguards and BlackRocks of the
world.”
No rules
The predominant issue facing
asset managers remains the lack
of regulatory clarity from global
policymakers. For example, there
is still debate in the US over the
classification of cryptocurrencies,
and whether they are securities or
not. The answer to this will dictate
which US body regulates them.
However, this is just the top of a
long list of barriers to entry.
Gradually market infrastructure
players are bringing solutions to
the table, but for cryptocurrency to
be a viable option for asset manag-
ers there needs to be an ecosystem
for a fully-functional buy-side
landscape.
This should include custody,
prime brokerage, fund accounting
services, and portfolio analytics
tools for a typical asset manage-
ment industry.
“Institutional asset managers are
R E V I E W
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C R Y P T O ]
sitting on the side-lines waiting for
more regularity clarity and an ap-
propriate investment vehicle,” says
Richard Johnson, vice president of
market structure and technology at
Greenwich Associates. “Speaking
for the US market, both of these are
beginning to emerge.
“In the meantime, many hedge
funds are investing directly in
the crypto space, and there are
dozens of dedicated crypto funds.
Some crypto funds are offering
a crypto-index fund (e.g. top 20
coins). Asset managers could gain
exposure to crypto by investing as
an LP in one of these funds.”
Whether it’s cryptocurrencies
themselves, the underlying block-
chain technology or tokenisation
of securities, there is no major
financial institution in the world
that isn’t conducting some form of
exploration.
In time we may have a cryptocur-
rency market with all the necessary
plumbing and infrastructure along
with institutional money, but until
then we are likely to continuously
hear stories of various angles the
major players are taking.
It’s reminiscent of news content
in the run up to MiFID II about
which asset managers had decided
to absorb the costs of research
or which firms had registered to
operate a systematic internaliser,
but ultimately no single stance
will likely represent the entire
industry.
“It’s an area where asset managers can
be innovative, they are starting to offer
new products to their investors.”
ED GOULDSTONE, HEAD OF PRODUCT MANAGEMENT, LINEDATA
Issue 57 // TheTradeNews.com // 61