Crypto-Assets: Too Big to Ignore, Too Challenging to Trade?

Although cryptocurrencies have become too big for institutional investors to ignore, there are still significant barriers deterring them from entering the crypto space, said speakers at Profit & Loss’ 2018 Latin America conference in Mexico City.

Speaking on a panel at the event, Michael Moro, the CEO of Genesis Trading, argued that a lot of traditional financial services firms were caught out by both the popularity and the longevity of crypto-assets.

“I believe that – especially in the US – that the major institutions got caught. I don’t believe they ever wanted to deal in cryptos, they thought it was a fad or a ponzi scheme and were waiting for the bubble to burst and the whole thing to go away. But instead this market has grown significantly, both in terms of employment and dollars, and the price appreciation of cryptos in 2017 got to a point where institutions could no longer claim that this is simply going to go away. So now these institutions are scrambling to try to figure out what their strategy is regarding these assets because it’s now becoming a market that you just simply can’t ignore anymore,” he said.

Similarly, James Radecki, global head of business development at Cumberland, said that “the institutional money keeps inching closer and closer” to the crypto markets, but he added that there are a number of factors that are currently inhibiting these firms from actually becoming active participants in these markets.

“There are five barriers to entry that are keeping all that institutional money from crossing over. The first is global access to liquidity; when big money comes in they don’t want to have to scrape across multiple different liquidity destinations to get their fill at a price,” he said.

The second barrier listed by Radecki was the settlement process. He pointed out that settlement in fiat currency can be difficult and slow and the repo market and lending markets that are necessary to help grease the wheels in a traditional financial ecosystem are lacking in the crypto markets.

Radecki said that the third barrier is concern about the custody and security of these assets, although he claimed that there are numerous firms that are working “feverishly” to try and produce solutions that could help alleviate these concerns.

He continued: “The fourth barrier, believe it or not, is research. There is no standardisation or harmonisation in the way that people value these products. In 2017 we hit an inflection point where years of education that had built up around blockchain and crypto-assets were matched with venture capital and lit this wick of market activity. We think that 2018 will be the year where products are either adopted or fail and we’ll get a better sense of where valuations should be. People will start harmonising the way that they set valuations, and this will make it much easier for the real institutional money to crossover.”

But, perhaps the most important barrier of all, said Radecki, is regulation, and more specifically the uncertainty about the future regulatory treatment of crypto-assets.

“We could all benefit from a little certainty in the global regulatory platform,” he concluded.

This last point in particular was echoed by other speakers on the panel.

“[Regulation] is one of the things that could kill our business or it could make it explode because of the opportunity,” said José Rodríguez, the vice president of payments at the cryptocurrency exchange, Bitso.

Carlos Mosquera Benatuil, general partner at the hedge fund, Solidus Capital, clarified that his firm is hopeful for more regulatory clarity as opposed more regulation going forward.

“What we worry about is: Who is going to be regulating this? Do they really know this market and understand this technology? What we don’t want is a situation where the regulators don’t understand what they’re trying to regulate. So we right now we just want regulatory clarity,” he said.

Unsurprisingly given the panel topic, there were numerous questions for the panellists from the audience, the first of which centred around the value of crypto-assets. Namely, the audience wanted to know: where is the intrinsic value of these assets?

Mosquera Benatuil initially responded by pointing out that there is roughly $8 trillion of value attached to art pieces in the world, items that have no utility value and whose values are highly subjective.

Rodríguez then went on to add that cryptocurrencies do, in fact, have utility value due to the solutions that can be built on top of the technology underpinning them.

“To give you an example, we use bitcoin for international transfers, for remittances. These payments cannot be fraudulent – it’s not like with a credit card where the card can be cloned – there’s no chargebacks and you can make transactions 24/7. Can your bank make a payment from Mexico to India in one minute? No, it takes more than a week and it will probably never settle. By contrast, with this technology we actually can send that payment in just one minute,” said Rodríguez.

He continued: “We’re launching a card right now that will enable users to pay with their Bitso balance anywhere that accepts Visa or Mastercard. So it’s still early days, but these are some use cases and, whether it’s using the technology from bitcoin or ethereum or ripple or litecoin, we can build solutions that traditional financial technology cannot match right now.”

But despite this potential utility value, Mosquera Benatuil explained that crypto-assets are still regarded as high risk investments and therefore many of the more institutional sized players only want to hold a small amount relative to their overall portfolio.

“This is a super high risk investment for institutions, and that’s why we’re recommending to treat it as an asymmetric investment. So these firms usually invest one to two percent tops from their traditional portfolio in these assets. In the region in Latin America region we’ve actually seen some families divest from gold and invest that same amount of money into crypto, so they clearly feel like it is a new store of value. But like any new asset class, they only invest in it as a small percentage of their total portfolio,” he said.

Galen Stops

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