This is the first in a series of articles sharing my thoughts about the entry of traditional finance into cryptocurrency markets. See the full series on this page.
If you listen to people in the cryptosphere, you’ll hear a lot of chatter about “institutional investors,” financial professionals who manage large investment funds. Many people believe these investors will soon flood cryptocurrency markets with a tidal wave of money, bringing unimaginable wealth to all and saving cryptocurrency from its impending death. Wall Street will bring its wares to Cryptocurrency Drive and soon we will see MOON, FOMO, and LAMBO. Bitcoin will reach $1 million and John McAfee won’t have to eat his penis. Salvation!
They say this money will start pouring in later this year, when Fidelity begins to offer cryptocurrency products and Intercontinental Exchange opens Bakkt, a marketplace where huge institutional funds can move massive amounts of money from traditional markets into cryptocurrency. NASDAQ should also have its first cryptocurrency products later this year. Börse Stuttgart launched its Bison trading app and announced plans to build a full-fledged cryptocurrency exchange. The Stock Exchange of Thailand will open its own digital asset marketplace. All this on top of the smaller exchanges like Binance, Coinbase, and Gemini expanding their platforms to capture large investors and professional money managers.
As Morgan Stanley reported in its summary of the investment industry’s view of cryptocurrency, many institutional investors consider cryptocurrency a new asset class they can make money with. They understand the value of having a little cryptocurrency and they’re encouraged by several studies showing average people generally interested in buying cryptocurrency but unsure of how to buy and scared of scammers. They know financial professionals report their only concerns about cryptocurrency are regulatory and legal, not financial.
The interest is there. The only barrier is access and the perception of risk.
Wall Street is more than happy to knock down those barriers by providing safe, easy, regulated ways for large investors to buy cryptocurrency. In fact, Fidelity has already started educating its clients about cryptocurrency. Hence the theory: once these traditional financial companies open their cryptocurrency platforms, lots of money will enter the cryptocurrency market. Up to $22 trillion in US-registered investment funds alone, much more abroad and unregistered.
Mark, that’s great news! What’s the problem? We’ll all make money!
Maybe, but I’m not sure it’s going to work like you think it will.
Before I tell you why, let’s step back and make sure we’re all talking about the same thing here. “Institutional investors” is a catch-all term for many different types of capital pools—endowments, commercial banks, mutual funds, hedge funds, pensions, trusts, family offices, etc. Different types of funds with different rules, strategies, risks, liabilities, and structures. Some will never want to buy cryptocurrency, others will never be allowed to buy cryptocurrency, and some have already bought cryptocurrency. Of the few who use these new investment platforms, most will either play the markets or store their cryptocurrency with the exchanges.
Yes, new money will go into the market, but it will also go out of the market. These funds are run by professionals with an obligation to deliver the best returns for their clients. Those guys aren’t going to make decisions based on a Twitter shill and HODL when the markets go down. They won’t sit on a 500% gain because Reddit says the price is going higher. They will study the projects they invest in, follow the markets, identify entrance points, and plan exit strategies. They’ll hedge their bets with derivatives. They’ll sell their bad projects before you hear the bad news and buy the good projects before you can FOMO. They’ll find ways to wring profits from the markets, possibly at your expense.
Their job is to make as much money for their clients as possible. Most of them have a legal obligation to do so. They may appreciate cryptocurrency and believe in its potential, but that’s a secondary motivation. Money is the driver here.
Of course, Mark. Wall Street is greedy. Duh. Why is that a bad thing?
It’s not greed that bothers me. It’s not even Wall Street, specifically.
It’s this obsession with institutional money. It’s putting your faith and hopes in institutional money. Investment institutions want to make money off of cryptocurrency, exchanges want to make money off investment institutions, and you exist solely to provide liquidity (somebody to buy their crypto so they can profit).
You may say “Mark, I already bought my crypto, I’m not going to fall into that trap. I own the land, and they’re coming for the gold! They’re going to make me rich!”
Maybe. Let’s assume that’s true. What about your neighbor who’s never bought cryptocurrency? He sees bitcoin go up 300% in 2019 and hears all the chatter about how everybody’s buying it and it’s safe now and it’s easy now and his investment advisor is telling him to put a few bucks in because he might just make a lot of money. Who’s looking out for him? Will you have the discipline to resist the texts from your friends and the media coverage telling you to buy after the pump? Will the cryptocurrency markets withstand the inevitable outpouring of scammers trying to make a quick buck off of people who don’t know how cryptocurrency works? What will that do to the credibility of the cryptocurrency market? Of the governments that let cryptocurrency flourish, what will happen when the money runs out?
What happens when the big investors sell? When millions of people lose their money? Do you think people will say “welp, I gambled and lost, oh well, I take full responsibility for my actions” or do you think they’ll say “I knew cryptocurrency was a scam, I can’t believe I fell for it, and I’m never using it again.”
All this focus on price and profits will delay the natural organic development of an innovative technology that has the potential to transform global commerce. Hype is the enemy of progress. It creates noise and distraction and keeps entrepreneurs and developers from testing, refining, developing their businesses and products. It always ends in disappointment.
Yes, cryptocurrency is a great speculation. But its value does not come from selling it to another person for more than you bought it for. Its value comes from actual usage. One Thing You’re Getting Wrong About Cryptocurrency
I’ll write more about Bakkt, Fidelity, and institutional investors over the coming months. I don’t mean to come across as negative. I’m not — I understand this is a natural progression. More engagement and awareness is not necessarily a bad thing, and a lot of good could come from having this new money enter the cryptocurrency market. I’ll write about that, too.
While I’m selfishly happy to have institutional money pump the markets, I worry about the average person. I’m also worried about what happens to cryptocurrency once the investing mania ends, and I’m not thrilled about the idea of seeing big financial players making money off the greed of uninformed people trying to get rich quick.
If that happens, Warren Buffet will be right in saying “bitcoin will end badly.”
And you and I will be left holding the bag.