It may not feel like it, but cryptocurrency is now a legitimate institutional investment option. This is the position of global financial giant Morgan Stanley, which recently published (in pdf) the results of a study regarding cryptocurrency’s evolution.
In an update to its “Bitcoin Decrypted: A Brief Teach-In and Implications” report, the company looked at the last six months of Bitcoin Core (BTC) and pointed out several trends seen with the cryptocurrency. The report’s authors described what they call a “rapidly morphing thesis” of the crypto market, which began with BTC begin defined as “digital cash” in 2016. From there, it morphed into an alternative that would overcome certain limitations of the financial system and then proceeded to become a new payment system. It has now evolved further and is a verified institutional investment asset class.
The ecosystem has evolved, explains the authors, due to several factors. Several high-profile hacks, the recording of all transactions on a permanent ledger, new options that are cheaper than BTC and market volatility are just a few that have forced cryptocurrency’s evolutionary cycle.
That evolution has resulted in the determination that crypto is a “new institutional investment class,” a designation it has held for about a year. Looking at strictly the amount of assets that are currently held under management, there is certainly some legitimacy to the assertion. Currently, there is around $7.11 billion worth of crypto being managed by a variety of financial firms, including private equity and venture capital firms, as well as a number of hedge funds.
Crypto as an institutional investment is more than likely going to evolve even further. Fidelity Investments said in September that it would launch cryptocurrency products by the end of the year. Additionally, Bakkt, the crypto trading platform that was born out of a collaborative effort between the Intercontinental Exchange, Starbucks and Microsoft, is expected to go live this December.
Morgan Stanley did offer a word of caution, however. It noted that regulatory uncertainty, a lack of participation by large financial institutions and a lack of regulated custodians is keeping a large number of investors away. The entrance of Fidelity and Bakkt into the ecosystem should go a long way to overcome these concerns.
Note: Tokens on the Bitcoin Core (segwit) Chain are Referred to as BTC coins. Bitcoin Cash (BCH) is today the only Bitcoin implementation that follows Satoshi Nakamoto’s original whitepaper for Peer to Peer Electronic Cash. Bitcoin BCH is the only major public blockchain that maintains the original vision for Bitcoin as fast, frictionless, electronic cash.
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Credit card company VISA is waiting for cryptocurrencies to be more widely used before making them a business priority.
CEO Al Kelly said in a CNBC interview with Jim Cramer that “there has to be some market that it becomes somewhat like a fiat currency in order for us to be comfortable” investing in cryptocurrencies.
Kelly said that a sign of the market being big enough to warrant the company’s focus was when “crypto starts moving from being more of a commodity to actually really being a payment instrument.” At the moment, he said the industry posed no threat “in the short term to medium term in any way.”
He said that when the market moves in the direction of cryptocurrencies, “we will move in that direction… We want to be in the middle… of every payment flow in the world regardless of how it happens or what the currency is behind it. So if we have to go there, we will go there. But right now, it’s more of a commodity than a payment vehicle.”
The blockchain community sees the advantage of cryptocurrencies like Bitcoin Cash (BCH) as precisely reducing intermediaries for money transfers. BCH transactions are currently recorded in 32MB blocks, although this is set to go up to 128MB as the network upgrades in November. Blockchain research and development firm nChain is already offering the Bitcoin SV (Satoshi Vision) client version 0.1 through GitHub, with default maximum block size of 128MB, which further increases the number of transactions possible on the BCH blockchain.
So far, VISA’s foray into cryptocurrencies has been limited to allowing companies to facilitate cryptocurrency debits for payments. Competing firm Mastercard has also dabbled in the blockchain business, currently studying how the technology could improve its payment systems.
Mastercard has also filed a patent for blockchain to be used in the management of fractional reserves, where loans could be made multiple times that of the amount deposited, as done in the modern fiat banking system. In its patent application, the company notes how blockchain’s ability to allow for payments while keeping other personal information safe and secure could be beneficial if such transactions could be sped up. “The anonymity of the blockchain may leave the payee at a disadvantage, because the inability for the payee to identify the payer may prohibit the payee from utilizing various risk or fraud detection methods. Therefore, many entities… may be wary of accepting blockchain currency for products and participating in blockchain transactions,” the application read.
Note: Tokens on the Bitcoin Core (segwit) Chain are Referred to as BTC coins. Bitcoin Cash (BCH) is today the only Bitcoin implementation that follows Satoshi Nakamoto’s original whitepaper for Peer to Peer Electronic Cash. Bitcoin BCH is the only major public blockchain that maintains the original vision for Bitcoin as fast, frictionless, electronic cash.
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Cryptocurrency investments on an institutional level are gaining pace, despite the belief by some that the market is about to implode. A few days ago, the Ivy League school, Yale University, decided to invest in a large, $400-million investment fund offered by Paradigm. Now, five more universities are putting their endowments to good use and have invested in other funds.
According to a report that first surfaced by media outlet The Information, Dartmouth College, Massachusetts Institute of Technology, Harvard University, Stanford University and the University of North Carolina are now crypto investors. Each has invested in at least one cryptocurrency fund by way of their school’s endowments.
A source who wasn’t unidentified by name told The Information that the schools have collectively invested tens of millions of dollars in the funds. The funds are used to buy equity stakes in various cryptocurrency companies, as well as to invest directly into digital assets.
According to a journalist with the news outlet, Jon Victor, “A move by endowments into funds that will directly bet on cryptocurrencies signals a major shift in investor sentiment toward the asset class, in the same way that institutions over the past decade became more willing to invest in private tech companies. Backing from such closely watched institutions could help validate cryptocurrencies, which are still considered too risky by many institutional investors.”
Many have predicted that institutional investments in cryptocurrency were coming. Mike Novogratz of Galaxy Digital said over the summer that big investments were coming, but added that they would only be facilitated following the introduction of companies such as Goldman Sachs into the space. Ari Paul, a former portfolio manager for the University of Chicago and current crypto fund manager, has also said that educational institutions would jump on board once schools like Yale stepped in – he was apparently correct.
Institutional investors are notoriously more pragmatic about any investments and more so about crypto investments, given the volatility associated with the markets. However, a survey that was recently conducted by the Wall Street strategy firm Fundstrat revealed that these investors, once they are into crypto, turn more optimistic about crypto’s prospects than do retail investors.
Note: Tokens on the Bitcoin Core (segwit) Chain are Referred to as BTC coins. Bitcoin Cash (BCH) is today the only Bitcoin implementation that follows Satoshi Nakamoto’s original whitepaper for Peer to Peer Electronic Cash. Bitcoin BCH is the only major public blockchain that maintains the original vision for Bitcoin as fast, frictionless, electronic cash.
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