Institutional investors and crypto investing: an understanding

The first step on this would be understanding and defining the investable universe. Some of the challenge in how to think about crypto investing may be definitional. While the popular narrative highlights only the current liquid alternatives — Bitcoin, Ethereum, Ripple, Bitcoin Cash, EOS, etc. — there are actually more than 1,500 “liquid” coins listed on CoinMarketCap.com from which institutional investors can theoretically choose to build a portfolio. And even all those listed coins represent only a fraction of the investable universe.

Mainly retail investors invested in crypto assets, which is something that has been happening throughout all these years. Increasingly and at the same time, institutional investors such as banks, family offices, asset managers, and insurance companies started getting interested in Bitcoin, Ethereum, and other crypto assets. For these types of investors, regulatory requirements, risk management, and traditional investment processes need to be met. The digital asset ecosystem has grown and developed rapidly and now provides the required legal certainty that we have known from the traditional financial markets for decades. But institutional investors that seek to invest in crypto assets need the technical infrastructure to manage them easily, efficiently, and securely.

Depending on the type of investor, different solutions are available. Typically, an order routing system is required to execute orders on a larger scale, so that prices are not affected due to low market liquidity. These systems become even more powerful if they are connected to institutional-grade crypto custodians that provide reliable storage and security services for the purchased assets. In addition, a broker-dealer license could streamline the investment process. And ultimately, Bitcoins and other crypto assets could be converted into bankable assets.

More broadly than just cryptocurrencies, cryptonetworks are a new way to build digital services, where those services are owned and operated by a community of network participants rather than by a centralized corporation. Think about all the internet-based applications and services we have today, and about what it took to get here — layers of infrastructure, storage, compute, native apps, more — and now, imagine a decentralized version coming for each of those. Considering this, we could all think about all the as-yet unknown applications that may be uniquely possible due to the underlying technology. Much like the early architects of the internet could not have predicted ecommerce at the scale of an Amazon, social networking at the scale of a Facebook, content creation and distribution at the scale of a Netflix or YouTube — all of which were only made possible once we had building blocks like payments, mobile, and bandwidth in place.

Tokens introduce the economic incentive for network members to develop and govern those networks appropriately. As such, the tokens in cryptonetworks perform a series of functions: as value exchange (for paying or receiving services); as a method to reward developers and other maintainers of the network; as a draw for early community members or beta users; and so on.

Thus, tokens are the glue that binds the various stakeholders in a cryptonetwork and aligns incentives among all participants. The bigger picture here is that cryptonetworks are about building the next phase of the internet, powered by software and these economic incentives. Together, these have given us a new, potent, way to build digital services. most of these digital services are still being built, and will continue to be built out over the next several decades — they’re not yet listed on any exchange or market. And this is where the confusion lies for many institutional investors.

Just as a active public equities manager incorporates lots of independent data points into his/her analysis of whether or not to buy Apple stock at a particular time, any cryptonetworks manager will constantly talk with the entrepreneurs building new cryptonetworks; meet with the community of developers using tokens; and explore all the decentralized apps to more deeply and broadly understand the backdrop cryptocurrencies are playing out against.

This is precisely the activity of venture capitalists, who are really in the “engineering talent” business: VCs have to evaluate the talent flows into new areas of technology to assess the viability of that talent for delivering on the promise of the investment, especially when they’re pre- product/market fit (taking at least 5–10 years to play out). For crypto, one similarly needs to vet talent, product, and more. In fact, this is not that different from old-fashioned, early-stage venture: investing in pre-product teams (ideally with entrepreneurs participating in network usage and governance); going after big, risky opportunities; and taking a long-term, patient view (vs. short-term speculation).

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