A panel of eminent investors and traders in the field of cryptocurrency came together to discuss the evolution of the crypto investing space and the inevitable entry of traditional capital into the crypto market. The panel included Brian Kelly, CEO of BKCM; Bobby Cho, global head of trading for Cumberland, and an over-the-counter Bitcoin trader; Robert Dykes, CEO of Caspian, a crypto asset management solution; Wayne Trench from Octagon Strategy, another big player in the over-the -counter space; and Will Peets, portfolio manager at Passport Capital.
The Current Situation
The panel examined a multitude of topics covering the evolution of money management in crypto. A hot topic was the imminent arrival of big institutional money into the crypto markets and its effects on the overall ecosystem. Peets shared how Passport Capital have structured their digital holdings. He used his experience in cryptocurrency and regulations to structure the business. They started out by investing in blockchain via a co-mingled hedge fund (a fund consisting of assets from several accounts that are blended together.) They now have two vehicles for investing in cryptocurrencies.
The first is a dedicated fund, which only invests in liquid currency protocol application projects. They make sure that, due to regulatory issues, their investments do not have any appearance or structure of a security. The second is a hybrid fund of funds focused on funding initial coin offerings (ICOs), investments in the current fund, and other strategies. The focus is to enable collaboration with funds investing in the space and proving institutional players have access to the crypto market. Interestingly, the demand is being currently generated more from family offices and high net worth individuals (HNWIs) as compared to traditional institutional investors. Peets estimates that they are 6-12 months from jumping into the space.
Calling it a great transition, Trench concurred with Peet’s assessment. HNWIs have been at the vanguard of the crypto investing space, and institutional activity has seen a pickup only in the last six months. Though many fund managers of traditional investors are taking personal position in the market, at the fund level they are still figuring out custody and regulatory issues.
Cho had an interesting observation as he shared that his firm deals mainly with institutions, indicating that the first wave of adopters have started investing in cryptocurrencies. Dykes added that the underlying infrastructure is critical for all stakeholders. Institutional investors require additional transparency and risk management before they take the plunge. There are several other tools that an institutional investor expects from a fund along with a certain level of technology, a trading system, and regulatory clarity. There is a regulatory backlog due to the nascent industry. Dykes also shared that over 200 crypto hedge funds were launched in the previous year itself.
The Trade Size
Trench expressed that USD $10 million-$20 million trades are not the norm in the market. The usual size is a million or even lower as the market is currently dominated by HNWIs. Dykes stated that a lot of the hedge funds are not focused on assets under management, but they are trade-centric and churn their funds aggressively according to the market scenario. The panel also shared the importance of institutional players as, currently, liquidity is constrained, and only the entry of big players can bring the required depth to the market.
The entire crypto industry is full of participants who have pivoted from their existing careers in tech, investment banking, and fund management to take advantage of a revolutionary new technology that is changing how businesses and the entire financial system works. Fund management in the crypto space is poised to grow, and so will the demand for crypto fund managers. The managers will need to have a deep background in technology with experience in investment banking and global macro a plus.
Almost 46% of all ICOs failed. That is a scary number for an institutional investor who isn’t a venture capitalist. But the good news is that ICO contributors have started digging deeper, and new projects will be in an advanced stage of development at launch as compared to last year where a whitepaper and a website was enough to raise money. But they are still apprehensive about traditional investors wanting to invest in a security token as compared to a utility token. This would force companies to engage with the SEC for the listing process, a daunting task for any startup.
Panelists agreed that regulatory bodies are working hard to create a framework and it is only a positive regulatory landscape that will ultimately lead to mass adoption. The emergence of decentralized exchanges was also interesting, especially from the point of view of retail investors.
Family offices are currently leading the adoption in crypto investing. They are flexible, nimble, and ready to operate in a regulatory grey area. This is because they are more risk-on as compared to their institutional peers. But even family offices like the reporting structure and custodial features of the existing financial markets and would like to see a similar framework created in the crypto investing world before opening the proverbial capital floodgates.
Stephanie Vaughan is vice president at Block X Ventures. She is an experienced capital markets professional with a background encompassing crowdfunding, venture capital, and investment banking. She served as director of capital markets and development at StreetShares, a marketplace lender focused on providing small business loans to veteran-owned companies funded by Institutional, Regulation A and Regulation D investors. At StreetShares, she led all strategic initiatives for investor products. She also played a key role in raising the company’s $23 million Series B financing. Previously, she was a senior associate executing venture debt transactions for LunaCap Ventures and was an investment banking associate with Houlihan Lokey. A former captain in the United States Marine Corps, she served as communications and operations officer and held strategic roles assisting in re-designing the USMC Force and overseeing anti-terrorism efforts for U.S. Central Command in Afghanistan. She holds an MBA in Finance from Columbia Business School and a BA in Quantitative Economics from the United States Naval Academy.