“I know anecdotally of several [investment managers] that have accumulated between $100 million and $500 million.”
This year will go down in infamy as one of the worst in living memory, but Wall Street veteran Jenny Q Ta says there’s been at least one bright spot — 2020 has marked a big shift in attitudes towards cryptocurrency from the Wall St. participants who once eyed the asset class with distrust.
The year began with Australia burning down, and moved into a worldwide pandemic that sparked a financial crisis and an unprecedented phase of economic stimulus — before morphing into the biggest wave of global protests in decades over racial injustice following the death of George Floyd.
And when it comes to the U.S. dollar, the apocalyptic vibe has shaken the faith of the most faithful — and turned the Bitcoin fearful into the crypto fearless.
“Ever since coronavirus hit, a lot of my friends did get into Bitcoin,” explains Ta, founder of Titan Securities, Vantage Investments and the social media and crypto commerce platform CoinLinked. She said many scooped up their first Bitcoin following the Black Thursday crash.
“They literally left finance, traditional markets selling equity and they bought Bitcoin. Many of them did. And it’s doubled — and we’ve seen Wall Street double. The difference between the two, and this is what my traditional finance friends have been telling me, is that Wall Street went up based on fake money from the Fed pumping into the market. But they know Bitcoin has a fixed 21 million tokens and it’s based on demand and supply. They now believe it could be $50,000 or even $100,000.”
Ta, author of Wall Street Cinderella, said the nationwide wave of protests and riots also focused minds on wealth preservation.
“More and more of my baby boomer friends actually called around and said ‘let’s pull money out of the bank’. Right? Because banks can shut down anytime and you can’t go and withdraw your money.They’re beginning to feel that digital currency is more effective. Peer-to-peer is more effective. Decentralization and censorship resistance is extremely important.”
Sea change on Wall Street
Nathan Montone, the co-founder of M31 Capital, lives on Wall Street “right across from the stock exchange”. The 31-year-old, who started trading Bitcoin in 2011, has also noticed a big shift in attitudes.
“It’s crazy how fast opinion is changing,” he says. “Until very recently it’s been the case that if you talk to any traditional investment banker or anyone in private equity, they’d be like ‘Get that internet money out of my face’ or ‘I remember that from 2017, isn’t it dead now?’”
“But you’d be surprised how quickly it’s changed in the face of all the money printing. There’s a lot of interest in fixed-cap, scarce assets.”
Montone believes that perhaps 15% of those working on Wall Street now have some sort of an interest in cryptocurrency.
More and more traditional finance folk have been picking up the phone to get advice about crypto from Mike Alfred, the co-founder and CEO of crypto market analytics company Digital Assets Data. He says that “literally 20 friends from outside the industry” have reached out to him in recent weeks, trying to find out how to get involved.
Alfred’s company aims to provide high-quality information about crypto assets for institutions, in much the same way that Morningstar does for traditional assets
“My cap table is full of angel investors and there’s some guys that years ago would have thought Bitcoin is like a toy or a scam. And now they’re actively reaching out and asking ‘Hey tell me more about how Bitcoin works? Can you send me a couple of research papers so I can get up to speed and understand it?’”
Part of the appeal is getting in early on an emerging asset class – like internet stocks in the ‘90s. But he agrees with Montone and Ta that a major catalyst is a loss of faith in the system.
“Everything’s overvalued: Real estate is overvalued, bonds are definitely overvalued — equities are overvalued,” Alfred says. “I think the biggest catalyst for that is … printing trillions of dollars. This feeling that people increasingly have that maybe their U.S. dollars are not as safe as they thought they were.
“That’s really driving the narrative and it’s causing people who didn’t take Bitcoin seriously, three, four or five years ago, to say maybe there’s a 1%, or 3%, or 5%, allocation mix.”
Alfred says sophisticated investors aren’t looking for an altcoin to moon; they want limited exposure to a risky asset as part of a structured portfolio strategy.
“My friends are reaching out because they know I can put it in context, because they don’t want to talk to somebody who just says ‘100% in Bitcoin’,” he says.
“A lot of these folk are just looking for that legitimacy … they don’t want to just hear about how great Bitcoin is, they want to understand how it makes sense as a hedge.
“They want to know how it makes sense as a diversifier in a broader portfolio.”
Hard evidence of Bitcoin acceptance
The increasing interest from the top end of town is not just anecdotal. Institution-focused crypto asset manager Grayscale Investments has seen assets under management grow by 250% this year, to $4.1 billion.
And a Fidelity survey of 774 institutional investors, including pension funds, family offices, investment consultants and hedge funds across the five months to March found that 36% already had exposure to cryptocurrency. Europe leads the way with 45% invested, while in the US the number grew from 22% last year to 27% today. Fidelity’s Tom Jessop noted:
“These results confirm a trend we are seeing in the market towards greater interest in and acceptance of digital assets as a new investable asset class.”
In April, Renaissance Technologies’ $10 billion Medallion Fund began trading in Bitcoin futures and Andreessen Horowitz closed its second crypto fund with half a billion dollars in capital commitments. The largest bank in America, JPMorgan Chase, has also reversed course on Bitcoin from 2017, when CEO Jamie Dimon called it a “fraud” that was “worse than tulip bulbs”. These days the bank is happily approving accounts for exchanges like Coinbase and Gemini exchanges, and bank analysts released a report in June about the financial markets crash that found Bitcoin’s market structure to be more resilient than those of currencies, equities, Treasuries, and gold.
“Five years ago none of these guys were active in this market and now a bunch of them are,” says Alfred. “They are some of the most sophisticated institutional investors on the planet and they’re all buying Bitcoin.”
“I know anecdotally of several managers that have accumulated between $100 million and $500 million.”
Arrival of the King
Well-known early adopters from traditional finance — think Galaxy Digital’s Mike Novogratz, venture capitalist Tim Draper and Real Vision’s Raoul Pal — have recently been joined by Paul Tudor Jones, the founder and CEO of Tudor Investments.
The 65-year-old billionaire hedge fund manager made his fortune predicting and shorting the 1987 stock market crash, so it’s telling that in the midst of this year’s financial crash he chose to allocate 1% – 2% of his assets to Bitcoin.
“When I think of Bitcoin, I look at it as one tiny part of a portfolio. It may end up being the best performer of all of them, I kind of think it might be,” he told CNBC.
When one of the world’s top macroeconomic traders says he finds the ‘inflation hedge’ narrative of Bitcoin compelling, ears prick up. Montone says Jones’ announcement marked a coming of age for Bitcoin.
“By publicly announcing he’s buying it for himself and for clients, you know if you’re a fund manager who was thinking you’d get fired for doing this [investing in digital assets] you can now always point to Paul Tudor Jones and Renaissance Technologies buying Bitcoin,” he says.
“It’s removed career risk for traditional investors who are interested in the value drivers behind Bitcoin and scarce assets but don’t want to get fired for pitching it.”
Calling down the rabbit hole
One of the traditional finance people who picked up the phone to learn more about crypto was Michael Swensson — a former vice president at Goldman Sachs, and Chief Operating Officer, Enterprise Tech at Bridgewater Associates, with $165 billion under management. About a year ago he called up Montone to talk about inflation hedges, digital gold and crypto.
Swensson says he was fascinated by the tech and the transparency.
“There’s a couple of reasons why I started getting involved in crypto, one of them being the technology and the other the way in which transactions are very transparent, and there is not a small group of individuals setting policies on what the value of your dollar is. It’s a much more open source system,” he says.
“I could submit a transaction and I can watch it flow all the way into the blockchain. It’s pretty unique to watch it from one side to another.”
Montone says Swensson grew more and more enthusiastic.
“I watched him fall down the rabbit hole and just get more and more interested and more and more excited about the potential upside because Bitcoin and gold have the same value drivers — but one of them has a much more significant potential upside,” he says. “We talked for about a year before I pitched him on coming on as a co-founder.”
The pair launched the institutional grade crypto investment fund M31 Capital, blending Montone’s crypto native perspective with Swensson’s deep experience in traditional finance.
So why does a 40-year-old investment banker with a glittering career at the world’s largest hedge fund decide to throw it all away for the chance to work on a crypto fund with a few million to play with?
“Scale really means nothing to me,” he says. “The thing that is attractive to me, it’s the opportunity to not just invest in an asset class, but to help shape the direction of the asset class. It’s the ability to get your hands in there and actually help make crypto more accessible to the mainstream.”
Montone says Swensson is looking to his future, not the past. “It’s exciting. All the potential upside that’s on the table,” he says. “You’re not focused on joining a five to ten million dollar fund, you’re focused on joining a future multi-billion fund.”
And it’s a good illustration of why it’s individuals, rather than institutions, that are driving the move to digital assets.
“When people talk about this wall of institutional capital coming into crypto, they’re envisioning it being the funds right? Like Bridgewater gets into crypto,” says Montone. “I don’t think they’re thinking about it as kind of this slow drip of, you know, not institutional money coming in, but institutional talent coming in, people like Michael getting sold on the space kind of one by one, until all of Wall Street’s talent is in the crypto space rather than the equity space.”
Henrik Andersson spent a decade trading equities on Wall Street for Handelsbanken, one of the largest investment banks in Scandinavia. “I’ve been trading stocks since I was 12 years old,” he says. “I never imagined myself leaving traditional finance but then I discovered Bitcoin.”
Now the Chief Investment Officer for crypto fund Apollo Capital in Melbourne, Andersson believes that DeFi (decentralized finance) will play a key role in attracting institutional investors into the space.
That’s because DeFi protocols like Synthetix and Kyber Network are working products that have cash flows, unlike many tokens built on vaporware and grand promises in the ICO era. For the first time, tokens can be valued in a similar way to traditional stocks.
“I think that makes them much more appealing,” he says. “From time to time you hear ‘these things don’t have a value’ But that’s not true anymore in the DeFi space. Most of these assets that they hold, they have some kind of on chain cash flow that you can value using traditional metrics.”
To be sure, DeFi price to earnings ratios are high — at the time of writing, 65 for Balancer, 144 for Compound, 253 for Synthetix — but they are still ‘better value’ than Tesla’s P/E of 334… and many would argue that they have similar potential for disruptive growth. Swensson is tipping a DeFi led bull run that will draw in institutional interest.
“Absolutely, I mean it’s a big focus for our fund, we have many assets in the DeFi space that are up hundreds of percent this year,” he says.
Assets Bakkt
Jennifer Ilkiw, head of Intercontinental Exchange and Bakkt business development for the Asia Pacific region, says she was one of those drawn into the space by a lone crypto enthusiast talking it up at work as the Bitcoin price went parabolic.
“I got drawn into it first because a colleague at work kept talking about it — and he was even mining it at the time,” she said. “As the prices went up most people started looking at it — I was always amazed that as the price of BTC went up more and more people would want to learn about it.”
So when former Bakkt CEO Kelly Loeffler asked if she wanted to help the team in Asia, “I said yes before she even finished her sentence.”
Steve Lee was ‘that guy’ talking up crypto and blockchain at Goldman Sachs after he became fascinated with the technology after watching Don Tapscott’s Ted Talk on blockchain in 2017. The portfolio manager and trader began devouring every piece of content he could find on blockchain, checking the crypto news sites every spare moment, reading white papers and attending crypto meetups.
“Then one day I started to notice my attention and awareness, it’s not on the desk at Goldman anymore. My attention is always on the blockchain stuff,” he recalls.
Lee joined Ari Paul’s BlockTower Capital in 2018. Trading in a high flying career for a crypto fund was seen as a risky move by some of his colleagues.
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“I talked to a lot of people and some were encouraging about my passion but some of the more senior people were ‘Why are you quitting? You have a great job here at Goldman and it’s a risky world out there, why are you trying to do it?”
“(But) the passion I had for blockchain … I was 35 years old and back then I had never been that passionate about something. That was almost the first time I just felt that no matter what other people say, I feel like I have to do it.
“I love the job, I love the people I met, I love the culture, but I should not let this passion go. I feel like I’m missing one of the lifetime chances, or opportunities, for me.
“So that’s when I decided to leave Goldman, even though I love the firm and the culture and the people.”
From fear to FOMO
Of course, it’s still early for crypto, and one of the factors working against the wholesale adoption of digital assets by traditional finance is the size of the sector. The combined market cap of all cryptocurrencies combined is $272 billion, a drop in the ocean compared to the $42.3 trillion managed by the world’s top 20 asset managers.
Lee says awareness among his traditional finance friends is high, but they’re not clamoring to get into the space just yet. For that to change he says there needs to be more education, widespread adoption of blockchain (whether in gaming or payments), and the trading and custody infrastructure needs to be refined to make institutional investors feel more comfortable.
“Slowly, traditional business people and financial institutions are coming in and this institutional level of service infrastructure to support this crypto market is being built every day. So as time goes on, I think more and more people will become more confident in this space,” he says. “The most important thing for traditional finance people to get in, is trust.”
Swensson cites Gemini as a good example of the sort of properly regulated and insured digital asset business that traditional finance people are comfortable with. It’s regulated as a New York State Trust and was the first crypto custodian and exchange to pass Deloitte audits for SOC1 and SOC2 financial operations compliance.
“These are industry firsts and so that’s laying the paving to a lot more traditional folks,” Swensson says. He adds that most people he talks to now about the space don’t express concerns over regulations or have an issue with the concept of digital assets. The issue is simply educating them enough to take the plunge.
“Most of the people in my personal network they’re generally interested and excited about the space, but are still learning about it,” he says.
“And once people start to do research and learn more about it and get their questions asked, nine times out of ten I find that person will go down the crypto rabbit hole and think ‘Why haven’t I invested sooner?”
