Analysis

2019: Crypto’s Year of ‘Consolidation & Preparation’

2019 didn't seem to bring the wave of institutional capital to crypto in the way that many hoped it would.

It seems that at the end of every year, cryptocurrency analysts, journalists, and industry players make the same prediction: next year will be the year that institutional capital really comes into crypto. However, as the year comes and goes, expectations are never met, and the cycle continues–surely, next year will be the year.

For most people, it seems that 2019 was certainly not the year.

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A blog post by investment consulting and digital asset management firm Vision Hill recently pointed out that “while handfuls of institutions have already started to invest in the space,” the amount of institutional capital that has actually made its way into the cryptosphere is small.

In all, the firm estimated that since the total market cap of all cryptocurrencies rests around $200 billion, “a small figure by institutional standards,” there can’t be much institutional money in the space–at least, not yet.

“Contrary to what many might think,” however, “we believe 2019 was an exceptionally interesting and productive year for the digital asset industry. We expect 2020 to be an even bigger year for the space than 2019.”

Indeed, despite the fact that the year was pockmarked with unmet expectations with regards to institutional capital (smaller incidences, such as the unsatisfying launch of the Van Eck Bitcoin Trust, and larger ones: most poignantly, perhaps, the launch of Bakkt), a number of analysts have pointed to 2019 as a year of preparation for crypto–the floodgates haven’t been opened yet, but by golly, they’re more ready than ever before.

But first–what’s going on with Bakkt?

“Services like Bakkt have started slow, but are growing.”

In the weeks and months preceding the launch of Bakkt, a rather hopeful narrative emerged: many believed that the Intercontinental Exchange-backed, CFTC-approved platform would finally open the floodgates of institutional capital that were just waiting around the corner for someone to let them in.

However, that isn’t exactly what happened–the exchange registered less than $2 million in volume during its first trading session; the platform’s first week capped off around $5 million.

Charles Phan, chief technical officer at cryptocurrency exchange Interdax, explained to Finance Magnates that even now, despite the fact that “the biggest exchange in the world–the Intercontinental Exchange–is involved, the highest number of contracts traded amounts to just 6,600 BTC”–as such, the massive positive impact that many thought that Bakkt would have on Bitcoin markets never materialized.

However, “open interest started to increase in late November, which tells us that more investors are actively holding positions,” Phan said. “While the uptake of the monthly futures contract has been positive, it is still relatively low compared to other bitcoin derivatives.”

Charles Phan, CTO of cryptocurrency exchange Interdax.

Still, volume has steadily been climbing on the platform. Trading volume on Bakkt hit a new all-time high on December 18th, when 6,601 contracts were traded.

Marc Bhargava, co-founder and president of New Jersey-based electronic agency prime brokerage Tagomi, told Finance Magnates that he believes that things may improve for Bakkt next year: “services like Bakkt have started slow, but are growing,” he said.

Bhargava also pointed out that regardless of the trading volume on Bakkt and similar platforms, their very presence in the cryptosphere is good for the industry as a whole: “[services like Bakkt] bring the credibility and security we haven’t seen from many other derivative product offerings,” he told Finance Magnates. We expect ICE to be a major player in derivatives, custody, and consumer apps in 2020.”

Crypto hedge funds have seen some growth, though expectations for 2019 may have been a little too high

Still, the underlying sentiment surrounding the narrative of institutional capital in crypto this year is a bit flat. Kevin Grulich, founder and CEO of algorithmic trading platform Cleo.One, told Finance Magnates that “in absolute numbers,” he believes that “the market is disappointed with the institutional inflows.”

“We can point fingers at any number of reasons why this could have occurred,” he continued. “Slow crypto market in general, the unsure stance of governments on crypto”–including China’s love-hate relationship with crypto, Trump’s tweets, and the global regulatory reaction to Libra.

However, Grulich said that perhaps the year would have been less of a “disappointment” if expectations hadn’t been set so high.

“One important fact is this: Crypto community suffers from a tendency towards positive bias,” he explained. “We overestimate the possibility and impact of positive events. These overestimations then serve as benchmarks for eventual disappointment.”

On that note, however, Grulich said that there have been some notable factors trending toward an influx of institutional capital: “We have seen a significant rise in institutional investments in crypto, if we compare to 2018.”

Kevin Grulich, founder and CEO of algorithmic trading platform Cleo.One.

In particular, Grulich pointed to Grayscale’s Bitcoin Trust. A report published by the company at the end of Q3 said that “in 3Q19, we saw the heaviest quarterly inflows to Grayscale Bitcoin Trust in the product’s six-year history, including nearly $75 million in a single day. July inflows also reached the highest level we’ve seen in a single month, well above the previous high of $64.7 million raised in December 2017.”

Additionally, digital asset investment firm Elwood published a report midway through Q3 of this year that said that “the median AuM of funds as of Q1 2019 (US$4.3m) is 3X that of the median AuM at fund launch (US$1.2m -January 2018), which indicates that funds have been relatively successful at fundraising despite difficult market conditions.”

However, of the “150 active crypto hedge funds collectively managing US$1bn AuM” that Elwood estimates are currently active, “over 60% of these funds have less than US$10m in AuM with fewer than 10% managing over US$50m.”

2019 may not have seen the entrance of many big financial institutions into crypto, but big institutions of a different stripe entered the space nevertheless

Still, Marc Bhargava also pointed to cryptocurrency investment fund performance as a positive point of measurement for the past year: “crypto fund performance was very strong in 2019, and total AUM is growing,” he told Finance Magnates.

“Institutional capital such as endowment, venture, and family office money, continues to come to the space largely through professional crypto funds such as Paradigm, Pantera, Multicoin, Electric Capital, Parafi, Standard Crypto, and Morgan Creek,” he continued. “We expect that to continue as it’s often the most streamlined way to get both venture and public market exposure to the space.”

Bhargava sees the growth in crypto funds as part of a more graduated for crypto industry growth: “I don’t see [institutional crypto investments] as a wave – but as stages of adoption,” he said.

As such, Bhargava pointed to the introduction of “big tech” in crypto as “an exciting sector of institutional [capital] to watch in 2020 is tech giants like Facebook coming into the space.”

Marc Bhargava, co-founder and president of New Jersey-based electronic agency prime brokerage Tagomi.

Indeed, in an interview with Finance Magnates conducted earlier this year, Bhargava said that Facebook’s entry into the space represented “we were expecting maybe Morgan Stanley or Goldman or JPMorgan to be more involved in crypto in 2017 when we were talking about when the institutions [would be] coming.”

However–as Bhargava pointed out–Facebook’s market cap (~$588.3 billion) is more than seven times the size of Goldman’s (~$81 billion) as well as Morgan Stanley’s (~$82.5 billion).

Therefore, Bhargava said that as the year draws to a close, there has been a large wave of capital coming into crypto–but perhaps not the way that many may have foreseen: “we’ve seen now some of the world’s largest institutions at least stake a claim and say that they’re coming,” he said. “Facebook is a huge example of that, but there’s also Square and SoFi, and others as well.”

2019 was the year of “consolidation and preparation from the institutional side.”

Bhargava also believes that platforms that serve institutional investors–including Tagomi–will also become more in demand over the course of the next year.

“We think the prime brokerage model will be increasingly compelling in 2020,” he said.” From a trade execution and best pricing standpoint, global liquidity is very fragmented, and being able to offer the best price and best fee structure is compelling.”

“Clients are also looking to interact with multiple custodians, lenders, and borrowers in one place. I think a service to watch is settlement, and prime brokers like us, with the banking, custody, and client relationships, are best positioned to support that in 2020.”

Kevin Grulich also noted that although 2019 may not have been the year that a wave of institutional capital crashed into the space, it was certainly a year of “consolidation and preparation from the institutional side.”

“We’ve seen preparations work being laid down – Fidelity setting up Digital Assets division to address their user’s demands and setting up their new UK office to serve institutional clients from Europe,” Grulich told Finance Magnates. Additionally, 2019 saw some of the “biggest exchanges finalizing institutional solutions and much more.”

What’s more, as Vision Hill wrote, “the reality is institutional investors are still learning — slowly getting comfortable — and this process will continue to take time.”

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