Report: Wall Street Goes All-In On Crypto

The Wall Street Journal reports that institutional investors “take lead” in Crypto investments. 

Covered:

  • 2021 By the Numbers
  • Risk-On or Risk-Off?

2021 By the Numbers

Hedge funds, registered investment advisers, and companies step up their stakes in cryptocurrencies as the market becomes more mainstream.” This was the subheading in a recent report by the Wall Street Journal which details just how bullish Wall Street has become on crypto.

As another indication that “we are early“, the famous newspaper is still releasing articles, this one from Dec 2021, titled “What Is Cryptocurrency, and How Does It Work?” However, just weeks later, they admitted that institutions are piling in and leading the way in crypto, proving that “following the whales” may be a true adage.

The article highlighted the incredible growth in institutional adoption. In 2021, institutional clients traded over 1.14 trillion dollars worth of crypto on Coinbase, when in 2020, the figure was only 120 billion. This is staggering growth, nearly 1,000% in a year. This is notable because crypto is still an obscure pariah to many seasoned vets on Wall Street.

Credit: Bloomberg

Speaking on the growth of the crypto asset class from the retail dominated early days, pre-2020, Leah Wald, CEO of Valkyrie Funds said: “it’s a completely different game now than it was.” To that point, a survey of “300 institutional investors conducted by State Street in October found that more than 80% were now allowed to have exposure to cryptocurrencies.”

It’s also more than just traditional hedge funds getting their feet wet, though. Crypto dedicated hedge funds have cropped up in a big way. “There are about 856 operating today with $68 billion in assets under management, according to data from Crypto Fund Research, up from 31 managing less than $1 billion at the end of 2016.”

Large funds with assets of $500 billion or more have actually been the most bullish, with nearly two-thirds having dedicated crypto desks. The report notes that there is only one outlier; sovereign wealth funds. Sovereign wealth funds are state-owned investment funds; think pension funds, 401k’s, and the like. They aren’t in yet, however, Wall Street Journal predicts they will be “within two years.”

Credit: Visual Capitalist

Risk-Off or Risk-On?

As has been covered extensively, this adoption by Wall Street has led to bitcoin and crypto trading in lockstep with tech stocks. However, there appeared to be somewhat of a significant de-correlation this week in light of global unrest. Still, in January, bitcoin’s correlation to the Nasdaq 100 “was at its highest level since April 2020.”

Despite this, Bitcoin’s volatility is still present even as it settles in the mainstream. Many have compared the wild swings of Amazon in the early days to where bitcoin is now. It is in fact, “still early.” The difference with bitcoin, though, as famous investor Bill Miller pointed out recently, is that bitcoin is “insurance against financial catastrophe.”

Whether bitcoin emerges as risk-off or risk-on is still an open question. We have discussed before how bitcoin is much more of a commodity than equity, because of the proof-of-work element. While proof-of-stake mirror equities and holdings are more akin to “shares.” Bitcoin plausibly will emerge as something wholly distinct from every other crypto, and become what Miller imagines it to be.

When such catastrophes take place, investors run to Gold, and depending on the severity, big tech stocks like Amazon as safe havens. The narrative will continue to grow that bitcoin is the best out of the lot in such circumstances. So, now that Wall Street is in, what is the next shoe to drop? Bitcoin treasuries, sovereign wealth funds, and insurance companies seem to be on deck. 

When that happens…

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