At last month’s Consensus 2023, CoinDesk hosted two invitation-only Investor Manager Roundtables, one designed specifically for institutional investors (35 pensions, single family offices, sovereign wealth funds, and endowments and foundations) and the other for asset allocators (50 funds of funds, asset managers, and pension consultants).
TradFi Investors in 2023 Remain Bullish on Crypto’s Long-Term Prospects…
With the help of AIMA’s Michelle Noyes (thank you, Michelle), I presented the same 10 survey questions to both groups and recorded their responses in real-time to get a sense of how these mostly TradFi investors are thinking about crypto. (About half of the managers were “crypto natives”).
Angelo Calvello, Ph.D., is co-founder of Rosetta Analytics, an investment manager that uses deep reinforcement learning to build and manage investment strategies for institutional investors.
Another indication of the groups’ bullishness is their responses to, “When will we see large-scale institutional investments in crypto?” 32% of institutional investors said it is already here, with 16% saying they expect it in 1-3 years and 36% in 3-5 years. (Keep in mind this group self-identifies as long-term investors). Only 4% said that large-scale institutional investment will never occur.
Managers were less bullish on the short-term prospects, probably because they have seen an immediate decline in AUM, with just 12% agreeing “it’s already here.” However, 46% expected such adoption in 1-3 years and 30% in 3-5 years. Unlike institutional investors, the managers could be talking their own books.
The relative bullishness of both groups’ responses was surprising, given their single greatest concern was U.S. regulatory uncertainty (72% institutional investors and 76% managers). I would have expected both groups to be decidedly bearish or at best neutral on crypto investing and their outlook for crypto to have diminished, especially because the survey was administered after Coinbase’s Wells Notice, SEC Chair Gensler’s April 18 testimony before the House Financial Services Committee, and the widely held view that this regulatory uncertainty is likely to continue for a while. A handful of institutional investors also expressed concern about cyber fraud and market manipulation, while several managers were concerned with subject complexity and volatility.
Yet, their responses to “What event is most likely to be the catalyst for investing, or increase your investment, in crypto?” reveal a pent-up demand. Both groups selected “clarify the U.S. regulatory framework” as their number one catalyst (60% of institutional investors and 64% of managers). And, harkening back to my maiden CoinDesk op-ed in February, their second choice of a catalyst was “solid investment opportunities” (32% of institutional investors and 27% of managers). So, crypto still needs to put on big boy pants if it is to attract serious TradFi investments.
‘It’s Time for Crypto to Put on Big Boy Pants’: 5 Ways TradFi Investors Are Rethinking Crypto in the Wake of FTX
Crypto’s future depends upon traditional finance (TradFi) investors. I’m not talking about banks and asset managers but the pension funds, endowments, foundations, and large family offices that control large pools of discretionary, patient capital. If crypto is to realize its transformative potential, it needs these institutional investors to start writing checks.
To understand how these investors view crypto, I asked 15 asset owners, none of whom could even be remotely described as a crypto zealot and each responsible for managing or advising multibillion-dollar portfolios, “Given the events of 2022, what would give you the confidence to invest in crypto-related opportunities, and what type of opportunity would you consider?” I added the caveat that their answer could not be “better regulation.”
Angelo Calvello, Ph.D., is co-founder of Rosetta Analytics, an investment manager that uses deep reinforcement learning to build and manage investment strategies for institutional investors.
Their responses revealed five key insights for the future of crypto:
This group’s confidence was not shaken by the crypto-related events of the 2022 “pullback” of bitcoin (BTC), ether (ETH), and other coins, the crypto credit crisis, or the ensuing contagion. Their reactions to these events ranged from sanguine (“the events of 2022 … do not mean much to me or crypto”) to fatalistic (“it [crypto] will bomb a few more times before it becomes institutional before we can trust actors know what they are doing”) to gleeful (“I’m all for the crash”), with several others viewed the events as a “necessary capitulation” that would result in a better, healthier ecosystem. More generally, none thought 2022 spelled the death of crypto.
On the contrary, they generally agreed with an endowment chief investment officer (CIO) that “crypto and blockchain are here to stay.” However, they all agree that for them to commit meaningful capital to crypto, the future of crypto must look much different from the past.
The future of crypto will not include investments in cryptocurrency trading strategies, according to the allocators. The managing director at a large family office forcefully pointed out that “we have no interest in crypto as a currency.” The head of alternatives at a corporate pension plan added that he viewed crypto trading as “degenerate gambling.”
The group also uniformly rejected the usual economic arguments for a core allocation to cryptocurrencies (it’s an uncorrelated asset, a store of value, or an inflation hedge). One large endowment characterized these arguments as “hypothetical.”
The future of crypto will be good crypto businesses, not good crypto products.
For these investors, 2022 was a watershed year for crypto. While this group views crypto writ large as a transformative technology that could lead to genuine and much-needed innovation, to date, these investors view the crypto ecosystem as “a giant crypto circle jerk that incentivizes people who contribute very little value creation.” An investment consultant described the ecosystem prosaically as a “hobbyist industry consisting of a limited group of technically sophisticated users. … What’s hot in crypto is not what institutional investors care about.”
To attract institutional capital, this must change. As one family office investor told me, “It’s time for crypto to put on big boy pants. Crypto people must stop building products for other crypto people.” Another allocator added that “We’re at a stage of dreaming and optimism.” A person responsible for venture capital investments at a family office said that moving from illusion to reality requires the ecosystem to start building “Web3 solutions (infrastructure plus applications) that are better than current solutions at solving real-world problems outside of the Web3 ecosystem/echo chamber (faster, cheaper, better user experience, better ability to capture value, etc.).”
The events of 2022, including the FTX scandal, did little to change their sentiment toward crypto investing, but these events are causing many institutional investors to upgrade their due diligence processes. 85% of institutional investors admitted they would improve their due diligence by spending more time vetting deals (52%), demanding more transparency on deals (52%), and digging deeper into operational risks (48%). (This survey question allowed respondents to make multiple choices.)
FTX Investment Now Worth Zero, VC Giant Sequoia Says- Nov 10, 2022, at 9:35 a.m.
Venture capital giant Sequoia Capital reassured investors the firm remained largely unaffected by the unraveling of crypto exchange giant FTX and wider decline in digital asset markets even as it marked its investment down to zero.
In a note to Limited Partners posted on the firm’s Twitter page, Sequoia said the exposure it has to FTX is limited, and whatever money it has lost has been offset by billions of dollars in gains.
Sequoia said that it has invested $150 million into FTX.com and FTX.us via its Global Growth III fund and $63.5 million into the exchange and its U.S. division via its SCGE Fund. These investments represent 3% of the Global Growth III fund and less than 1% of the SCGE fund.
“The $150 million loss is offset by the approximately $7.5 billion in realized and unrealized gains in the same fund, so the fund remains in good shape,” Sequoia wrote in a note.
The VC fund noted that in 2021, when it made the investments, FTX generated $1 billion in revenue and $250 million in operating income.
FTX’s investors include Softbank, Temasek Holdings, the Ontario Teachers’ Pension Plan, Race Capital, and Lightspeed Venture Partners, among others.
“We are in the business of taking risks. Some investments will surprise to the upside, and some will surprise to the downside,” Sequoia wrote. “We do not take this responsibility lightly and do extensive research and thorough due diligence on every investment we make.”- source: https://www.coindesk.com/
