A recent report by American investment bank Morgan Stanley indicates that bitcoin and other cryptocurrencies have become an investment asset class for institutional investors. The report, which is an update to an original research report titled Bitcoin Decrypted: A Brief Teach-In and Implications, mirrors the consistent and growing interest in crypto assets by accredited investors in 2018.
A New Institutional Class
The report which was published on Wednesday, Oct. 31 referred to cryptos as a “new institutional investment class,” that has been around for about a year. In its thesis, it noted that the crypto market has morphed rapidly and that institutions had full confidence in its ability to solve the current issues faced in the financial system. Bitcoin (and other cryptocurrencies) it said represents “digital cash”—a new payment system and ultimately a new institutional investment class.
It found out that the number of crypto assets held by hedge funds, VCs and private equity firms stand at about $7.11 billion representing a steady increase since 2016.
Institutional Investors Bet on Crypto
The report analyzed the trends around cryptocurrency investing in the last six months and concluded that institutional investors are flocking towards crypto investment as retail invests seem to be dissuaded by the current bear market. According to the report, the number of retail investors in crypto assets have not significantly increased compared to the number of accredited investors which have grown in the period reviewed.
Despite the downturn in cryptocurrency markets, 2018 has witnessed a surge in institutional interest. The first major avenue for regulated crypto investments came towards the end of last year when the CFTC cleared the CBOE and CME to issue physically settled bitcoin futures contracts. Since then, several crypto investment opportunities have been unlocked including crypto-based exchange-traded notes (ETNs).
The Rise of Stablecoins
Another trend noticed this year is the release of several stablecoins—crypto assets pegged at the price of fiat currencies like the dollar. The past few months only, the cryptomarkets have received major stablecoins from Gemini Exchange [GUSD], payment processor Circle [USDC], Binance exchange and a lot more. This is not unrelated to the growth of institutional interest in cryptos as stablecoins help solve the problem of instability that has discouraged institutions from crypto markets.
The report noted that trading has become more between crypto-crypto pairs against crypto-fiat pair hence the rise of stablecoins. It explained the reason for this:
“USDT took an increasing share of BTC trading volumes as cryptocurrency prices started falling. This occurred because many exchanges only trade crypto->crypto and not crypto->fiat. Trading crypto->fiat requires going through the banking sector which charges a higher fee. Also as bitcoin prices fell, so did most all other coins so if owners wanted to come out of bitcoin holdings, they needed to go to another asset which was closer to the valuation of the U.S. dollar.”
Challenges facing Crypto Investors
The issue of price instability is only one part of the problems faced by cryptocurrency investors. The report points out that crypto hacks, hard forks, and market volatility negatively affect investor decisions. Institutions in particular also have to worry about regulatory uncertainty, lack of regulated custodian solutions and a current lack of large financial institutions in the space.
As the crypto markets mature, these concerns are being addressed. As Smartereum reported, prominent UK-based Multinational security service firm G4S announced plans to begin a crypto custody service. Also, Goldman Sachs and Bank of America could offer similar service—the latter filed a patent for crypto custody system.
The Clamor for Bitcoin ETFs
One investment class that has proved elusive is the crypto-based exchange-traded funds (ETFs). The SEC has rejected several bitcoin ETF proposals but the crypto community doesn’t seem to be deterred by the rejections. Analysts believe that a successful ETF will boost the crypto markets long-term drawing parallels with the impact a gold-based ETF had on the gold market.