Many have said that the amount of institutional cash that has been flowing into Bitcoin and crypto markets over the past several months is unprecedented. However, the institutional flood into Bitcoin was not exactly unexpected.
Indeed, since Bitcoin’s big boom in late 2017, the institutional finance world has had its eye on crypto. While most institutions have been hesitant to make the leap, many of them have quietly been gathering information about Bitcoin and other cryptocurrencies should the right moment to invest arrive.
After years of developing the infrastructure to support institutional investments, it seems as though the right moment for many institutions to jump into crypto is now. Companies like MicroStrategy, Stone Ridge, and Square led the charge in the fourth quarter of 2020; Tesla’s $1.5 billion investment in Q1 of 2021 has caused some analysts to question if other major publicly-trading companies might follow soon behind.
Recently, Finance Magnates spoke with Peter Najarian, the Chief Revenue Officer of institutional at BitGo, about what is happening on the institutional side of the crypto space. BitGo has been dealing in institutional digital asset custody, trading and finance since 2011.
What Is BitGo?
Pete explained that: “we offer a custodial environment and trading platform whereby institutional investors can come and open a regulated and ensured ‘trust relationship’ with us, through a traditional trust account, and from there, enter into the purchase, sale, and securing of digital assets.”
“When a large institution comes into the market, it will look for the right partner or partners to access what is obviously a new and rapidly-changing asset environment,” he continued. “We’ve built, and now provide, what many believe to be the most secure and intelligent way to trade in these assets.”
Because BitGo’s clients are institutional investors, we asked Pete about what he has observed regarding the change in pace in which large institutions are entering the crypto space.
“It’s been an incredible change,” he said. “This is what all of us that are ‘believers’ had expected would happen at some time.”
“In a perverse way, with the realities of what’s happened with COVID, and, more importantly, this extreme monetary expansion that’s come along globally. There’s been a bit of an unlimited ‘money printing machine’ running at the Federal Reserve and other banks around the world.”
“As a function of that, there’s a great fear among big institutional investors that the only way out of this level of indebtedness is a long-term period of central banks essentially trying to inflate their way out of it. Effectively, this is called ‘monetizing the debt’,” Pete explained.
Yes, Institutional Investors Do See Bitcoin as a “Hedge against Inflation”
“Because of that, there’s great demand for ‘hedges to inflation’ or ‘hedges to currency debasement’. Bitcoin specifically has developed a use case as a store of value, effectively, as digital gold.” Peter added that this use case “is probably the most important use case for crypto in the early innings of this whole ‘shift’.”
“With that, we’ve had a significant wave of institutional investors making their first [crypto] investments, significant investments,” Peter explained, adding that Bitcoin is often the first investment that these investors make. “That’s now extending to some other digital assets, but it’s still primarily a Bitcoin investment thesis for these big institutions.”
“These institutions vary from big family offices around the world, to University endowments, to private and public pension systems. There’s an expectation that this trend is going to be led by hedge funds or folks that are going to be more interested in trading aggressively in markets. There’s been some of that, but even more than that, it’s been a wave of ‘buy-and-hold’ traditional institutional investors coming in and making their first investments.”
Peter added that some of the institutional investors that have taking the leap into Bitcoin may be surprising.
“For example, Mass Mutual is one of the oldest life insurance companies in the world, maybe the oldest, and they made a $100 million Bitcoin investment.”
Peter explained that pre-COVID, “if you had asked anybody that came from traditional finance that now works in crypto how long it would take for a firm like Mass Mutual to show up, we would have probably [said] that it would be more than five years.”
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“So, the pace of this is quite significant, and it’s taken everyone by surprise,” he said.
The Different ‘Species’ of Institutional Investors in Crypto
We asked Peter if BitGo’s institutional clients speak explicitly about Bitcoin as a ‘store of value’ or ‘hedge against inflation’ when they explain their reasons for wanting to invest.
Peter explained that from his perspective, the answer was yes, but that the reasons for investing in Bitcoin depend a bit on ‘variance of client types’.
“That includes folks that are dedicated to crypto funds, that exist purely to be investing in crypto,” he said. “That’s on one side of the spectrum.”
On the other side are “big institutions that don’t have a Bitcoin or crypto mandate at all that are making their first investment as a bit of a hedge against inflation and monetary expansion.”
With regards to clients on the ‘crypto-focused hedge fund’ side of the spectrum, “that conversation is about investments in digital assets that used to be esoteric but are increasingly mainstream,” Peter explained. These kinds of clients have “significant knowledge that expands well beyond Bitcoin among those folks.”
Bitcoin’s ‘Quiet Build’ Phase from 2017-2020 Has Resulted in the Infrastructure to Support Institutional Investors Properly
When it comes to more traditional institutions that are investing in Bitcoin for the first time, “there’s a lot of education” that needs to be done, Peter said. Still, “they show up knowing a lot” to begin with.
“That is how the narrative is misconstrued in the popular press,” he continued. “At the end of 2017, we had this huge rally to $20,000 that took everybody by surprise. Then, the market came back down off that, and we had a period of relative stability for the better part of a year.”
“During that time, and since then, there has been a ton of work done by any meaningful financial institution that’s managing capital for other people,” Peter said. These firms “have had some team of people doing work on understanding digital assets, and further trying to unpack what their participation in the marketplace would be, from a regulatory perspective, from a client perspective, et cetera.”
Therefore, as large institutions “are arriving to make their first investments in 2020 and into 2021, they’re well beyond ‘Crypto 101’. Even when you first interact with them, they typically have a deep knowledge of the space and a team of people that have done a fair amount of work.”
Crypto’s “Dirty Little Secret”
In other words, many of the institutions that are entering the world of Bitcoin and crypto today have been slowly gathering information about the space for several years. The influx of institutional investors that has come to crypto in recent months is the result of several years’ worth of behind-the-scenes progress.
However, it may still be a while yet before more ‘mainstream’ companies step into the world of crypto. Last month, Tesla became one of the first major publicly-traded companies to announce an investment in Bitcoin. Since then, many analysts have speculated that other, similar companies, for example, Apple, Google and Microsoft could follow in Tesla’s footsteps.
“It’s happening,” Peter said. However, “the big issue is regulatory clarity.”
“There’s a bit of a ‘dirty little secret’ behind all of this, which is that this is still a marketplace that requires the traditional banking rails for folks to be able to participate in. You’re not getting paid in Bitcoin; there isn’t a meaningful Bitcoin economy. It’s happening at some scale, but it isn’t significant to be disruptive yet.”
“For a big family office, or pension fund, or endowment to buy Bitcoin, they need the banking rails. They need to be able to turn fiat into crypto,” Peter explained. “We’ll help them do that, but they need to be able to deliver us the fiat, and they need a banking institution that will allow them to do that.”
“That’s been a source of hesitation for traditional large banks,” Peter said. “There’s been a bit of a market for crypto-specific banks, and there are a couple of good ones, Signature and SilverGate, in particular. But, we’re only in the early days of traditional banks starting to be willing to bank large crypto firms.”
Peter believes that this will change “as Coinbase goes public, there’s going to be more crypto infrastructure firms that end up as either acquired or public entities over the next couple of years, in my opinion. That will change the paradigm in terms of how the industry is regulated.”
Therefore, “regulatory clarity is coming,” Peter said. However, for the moment the lack of regulatory clarity is “a limitation more than anything else.”