Institutions are charging forward in crypto, even in the industry’s darkest days
December 11, 2022 Alex Rustok
After years of pooh-poohing cryptocurrency, institutions finally entered the crypto market last year and fell straight into crypto winter. The collapse of FTX was a knockout blow in an already brutal year. Although these have been some of the crypto industry’s darkest days, those institutions have an opportunity now – not just to buy bitcoin at deep discounts, but also to recalibrate their positions and perceptions of an asset class they may have misunderstood, or perhaps see differently after recent events. Not relying on institutions to keep people’s money safe is at the heart of bitcoin’s design, so it’s no wonder institutions didn’t like or trust it for so long. When they eventually saw the investment opportunity, they largely ignored the bitcoin ideals. “When there is money to be made, it is the human instinct to dive in not just because it is a metric of success, but it is often necessary for survival,” said Noelle Acheson, an economist at newsletter Crypto is Macro Now and former head of market insights at Genesis. “We are wired to do that, but that is not what crypto was created for.” Now, FTX’s quick unraveling is forcing investors to brush up on their understanding of bitcoin as they reckon with the idea that leaving their funds on exchanges like FTX or even Coinbase is riskier than they thought. CNBC spoke to several registered investment advisors who said the FTX collapse doesn’t change their crypto investing thesis but that it’s high time investors figure out how best to secure their crypto. “Right now [investors] are going back to basics, doing their homework, finding out what this means,” said Lyn Alden, founder of Lyn Alden Investment Strategy. “They’re also looking for more regulatory clarity.” Near-term risk Institutions often look at big crashes like this one as opportunities , Alden said. The price of bitcoin is almost 75% off its all-time high hit last year. They won’t come rushing in just yet, however. “People don’t want to buy a falling knife,” she said. “One way to manage risk is to look for stabilization, otherwise it could be a false plateau. They’re watching to see if anything more shakes out.” There’s a good amount of career risk involved too and what investors do with their own personal portfolios may differ from what they do with their institutional portfolios. Alden said she herself thinks it’s a good time to buy bitcoin, however, she thinks investors should proceed with caution over the next three to six months. She called it a “long structural opportunity,” but in a “challenging environment.” A big mistake many institutional investors made was in choosing crypto-related equities over the cryptocurrencies like bitcoin and ether themselves, or in holding their bitcoin exposure in securities like shares of the Grayscale Bitcoin Trust . The U.S. has not approved a spot bitcoin ETF. “Overall they generally seem more comfortable going into that. … The problem is that this is a very poor industry overall,” Alden said. “This is actually one of the industries where we probably don’t want to buy the industry. I think bitcoin is worth owning … but overall this is one place the normal heuristics of not wanting to take directional bets can actually come back to bite them.” Flight to safety Rather than exiting altogether, institutions in crypto are in it to stay and are now looking to beef up their trading and holding practices , according to Mike Belshe, CEO of BitGo, a custody service provider that serves institutions. Since the FTX collapse there’s been a flight to safety,” he said. “We see significant demand for our core offering – from qualified custody to proof of reserves to the BitGo Network, which allows clients to keep assets off exchanges and minimize counterparty risk and increase capital efficiency.” Belshe said institutional participation is lower than it can often seem, but that their presence will grow as demand from retail investors grows. “Institutions for the most part are not participating yet,” Belshe said. “There’s been tremendous retail demand and participation. These firms are mostly responding to their clients and they want to provide better products, services and tap into the better yields.” For example, last week Fidelity Investments launched commission-free trading for retail investors through a product called Fidelity Crypto. “I didn’t think that was going to come for a few years yet,” Acheson said. “To see Fidelity launch retail-focused crypto products in the midst of arguably one of our worst slumps ever is a very big deal. It’s what happens at the very bottom that matters most because that will ride the wave up.” In addition to banks and investment firms, brands like Nike and Starbucks have also entered crypto as a different cohort of institutions investing in a digital assets strategy. “FTX destroyed trust in the industry and may delay traditional finance institutions that haven’t already committed to digital assets to invest,” Belshe said. However, for “institutions and brands that are already building products in crypto and Web3, we have not seen a slowdown of interest to build, grow and invest.”