The answer is that it’s a little bit of both – some institutions are already involved, some are investing through VC funds, a lot are interested and starting to pay close attention, BUT the lion’s share of traditional, institutional asset managers (mutual funds, hedge funds, pensions, endowments, sovereign wealth funds, private wealth advisors, etc.) are still on the sideline.
So, who are the institutions that are already involved, particularly those that either invest or transact directly in digital currencies? They can generally be grouped in any number of categories:
- Digital Currency Funds – this group is all about digital currencies, tokens and other digital investment vehicles. They are the digitally-native fund managers that see blockchain and the associated digital currencies as the beginning of a blossoming investment management industry.
- Some Hedge Funds – there are a number of hedge funds investing partner capital in an effort to understand how the digital currency markets function and to make returns in advance of the inevitable the regulatory environment permitting them to manage outside capital in crypto and/or tokens.
- Family Offices – they are their own beneficial owners of the assets they manage, so they have the easiest time to allocate a certain percentage of their assets to something like bitcoin. At the moment, family offices are some of the largest crypto participants among what are thought of as more traditional institutional investors.
- Businesses that operate within the digital asset world – these companies offer services to both individuals and corporations that involve either the conversion of fiat to crypto, the movement of digital coins or some other service that involves a digital transaction. As a simplistic comparison, think of Toyota being a participant in the foreign exchange market because they sell cars outside of Japan, not because they are trying get additional returns from exchange rates. It’s only the need to convert foreign earnings back into yen that drives their entry into the forex market – but they are still required to make trades.
Anyone reading this should now have a good idea of who is already in the game (note: there are always exceptions and the list of exceptions is literally growing daily). However, the sum total of existing participants is TINY compared to the slice of institutions that make up the bulk of the pie – those managing other people’s money in the more traditional asset classes.
Simply put, there are a lot of safeguards that have been put into place over time within the more traditional asset space to protect investors from having someone run off with their money. There are clearing houses, custodians, depository corporations, government-sponsored insurance (SIPC, FDIC, etc) and a host of other protections designed to prevent a money manager from absconding with client funds.
While there are a lot of valid arguments that say at least some of these safeguards aren’t needed due to the inherent nature of peer-to-peer transactions, the almost immutability of the blockchain, the difficulty of a 51% attack, etc., crypto investing is nascent enough that even the appearance of a lack of safeguards is enough to make most money managers hesitate from dipping even their toes in. And that doesn’t even include the lack of regulatory structure that would allow a money manager to know where the permissible investment boundaries would be and when they would be outside of their client mandate.
Bottom line: there aren’t enough tangible protections, nor the obvious infrastructure geared towards the safekeeping of digital assets, to convince investment stewards, such as Chief Investment Officers and governance boards, to say “yes” at the moment.
But true institutional adoption of crypto by managers of OPM (other people’s money) is coming and I don’t believe it’s further out than sometime in later 2020 (although Facebook’s Libra may wind up accelerating that time frame).