Investors who have been burned by the year-long cryptocurrency plunge are probably not looking very favorably upon the cryptomarkets, and for reasons that one can only say are, well…”reasonable.”
Institutions, on the other hand–especially those who can shape the markets–see things quite differently. Case in point: the latest 50-page report released by Morgan Stanley titled Update: Bitcoin, Cryptocurrencies and Blockchain.
One of the key findings in the Morgan Stanley report is that institutional accumulation has begun surging at a moment when “retail” trading volume has been lagging.
Interestingly, institutional interest follows their observation of the retail markets’ notions that drove them to cryptocurrencies in the first place:
Cryptos are seen as digital gold;
Cryptos are an effective means for fundraising; and
Cryptos may serve as a hedge against dollar-based asset declines.
In the end, Morgan Stanley and other financial institutions are faced with the rapidly morphing possibility that these characteristics are manifesting nothing less than an emerging asset class.
Stablecoins–cryptos backed by the US dollar–have become quite a popular topic in the crypto sphere. As full adoption cryptos might signal a partial replacement of fiat, for those who doubt the timing of such a transition, stablecoins represent a compromise between full and partial adoption.
The Gemini Dollar (GUSD) launched on the Winklevoss’ Gemini Exchange, and the soon-to-be-released USD Coin (USDC) may soon become the fiat proxy for trading Bitcoin and other cryptos. The Morgan Stanley report suggests, following the basic principles of competitive markets, that the coin with the most cost-efficiency, liquidity, and regulatory soundness will eventually win the more significant part of the market share.
Okay, so institutions have picked up where retail investors have left off. But who are these institutional players? Which industries do they represent? Knowing who they are and where they came from may provide a clue as to what their motivations and goals are.
The report reveals that 48% is comprised of hedge funds. Another 48% come from venture capital. The rest comes from private equity. Among these institutional players, 50% comes from the US, 9% from China, 6% from the UK, and the rest from across the globe.
Here’s the big question: will all of this institutional investment trigger a crypto bull market in the near term? Famed crypto bull Mike Novogratz seems to think so. Crypto hopefuls are looking to 2019 as a potential “key year” for cryptos.
Of course, none of this comes without its own unique set of challenges:
Bitcoin’s electricity drain in mining operations is as problematic now as it was then when it first came into public awareness.
Lack of widespread Bitcoin adoption is also a key challenge: if nobody uses it in the commerce space, then what use is it?
AI and blockchain seen as a potential friend or foe is another issue of contention among institutional investors. Morgan Stanley sees AI and blockchain as threats to crypto adoption. Other enthusiasts, however, see the two technologies as complementary to crypto tech.
Quantum computing constitutes another challenge, as it can break blockchain encryption. Although still years away–but nobody can say how many, and it may be sooner than later–quantum computing is a problem that some crypto projects have already begun to address.
Counterbalancing these challenges, Morgan Stanley did state certain use cases in which blockchain may be immediately beneficial: namely, trade settlements, B2B payments, cross-border transactions, and client onboarding (KYC or Know Your Customer).
What we can glean from this report is that the crypto markets, similar to NASDAQ in 2000, is undergoing a tremendous shift in institutional perception. As retail interest fades, institutional interest surges. The latter is invested in paving the way not only for a resurgence in this new market but in developing and distributing applications that will expand the space beyond the speculative sphere once driven by retail investors.
The crypto sphere has a claim on the future as both an asset class and an enterprise-level technology.
And those retail investors who share this vision just might be rewarded when such a future materializes.