At last month’s Consensus 2023, CoinDesk hosted two invite-only investor manager roundtables, one designed specifically for institutional investors (35 pension plans, single family offices, sovereign wealth funds, endowments, and foundations) and the other for asset allocators (50 funds of funds, asset managers and pension advisers).
With the help of AIMA’s Michelle Noyes (thanks, Michelle), I presented the same 10 survey questions to both groups and recorded their responses in real time to get a sense of how these primarily TradFi investors think about cryptography. (About half of the managers were “crypto natives”).
Angelo Calvello, Ph.D., is co-founder of Rosetta Analytics, an investment manager that uses deep reinforcement learning to build and manage investment strategies for institutional investors.
Lede: So after the dramatic collapses of FTX and Celsius and the crypto bear market, how do institutions feel about the future of digital assets? Surprisingly bullish, with nearly 70% of institutional investors viewing crypto investing favorably, while over 95% of managers do.
Another indication of the groups’ optimism is their responses to “When will we see large-scale institutional investments in crypto?” 32% of institutional investors said it was already here, with 16% saying they expect it in 1-3 years and 36% in 3-5 years. (Keep in mind that this group identifies itself as long-term investors). Only 4% said large-scale institutional investments will never happen.
Managers were less bullish on the short-term outlook, likely because they saw an immediate drop in assets under management, with just 12% agreeing that “it’s already there.” However, 46% expected such adoption in 1-3 years and 30% in 3-5 years. Unlike institutional investors, managers could speak their own book.
Learn more: Angelo Calvello – 5 Ways TradFi Investors Are Rethinking Crypto In The Wake Of FTX
The relative optimism of both groups’ responses was surprising, given that their biggest concern was regulatory uncertainty in the US (72% institutional investors and 76% managers). I would have expected both groups to be decidedly bearish or at best neutral when it comes to crypto investing and their outlook for crypto to have diminished, particularly because the survey was administered after the Wells opinion. from Coinbase, SEC Chairman Gensler’s April 18 testimony before the House Financial Services Committee. , and the widely held view that this regulatory uncertainty is likely to persist for some time. A handful of institutional investors also expressed concern about cyber fraud and market manipulation, while several managers worried about the complexity and volatility of the topics.
Nearly 70% of institutional investors view crypto investing positively, while over 95% of managers do
Yet their responses to “What event is most likely to be the catalyst for investing or increasing your investment in crypto?” reveal a pent-up request. The two groups chose “clarifying the American regulatory framework” as the first catalyst (60% of institutional investors and 64% of managers). And, going back to my first editorial on CoinDesk in February, their second choice catalyst was “strong investment opportunities” (32% from institutional investors and 27% from managers). So, the crypto still has to put on some big boy pants if it wants to attract serious TradFi investment.
The events of 2022, including the FTX scandal, did little to change their sentiment towards crypto investing, but these events are causing many institutional investors to upgrade their due diligence processes. 85% of institutional investors admitted that they would improve their due diligence by spending more time verifying transactions (52%), requiring more transparency on transactions (52%) and going deeper into operational risks (48 %). (This survey question allowed respondents to make multiple choices.)
Learn more: Angelo Calvello – Why Financial Analysts Missed Silvergate’s Red Flags
Their improvements reveal that they have learned from writedowns of their investments in FTX and Celsius from Maybe Ontario Teachers Pension Plan and CDPQ that as trustees their due diligence of crypto investments must be at least as rigorous as that used for TradFi investments.
Managers also plan to change their due diligence processes, spending more time verifying transactions (36%), requiring more transparency (42%) and digging deeper into operational risks (36%). Yet investors are wary: 27% said they wouldn’t make any changes, which makes me wonder how a manager can have such hubris given their target market responses and FTX experience. of Sequoia (and other managers).
Because so much has been written over the past twelve months about the inherent investment benefits of BTC, we asked the groups the following (groups’ percentage responses are in parentheses): Do you believe BTC is.. .
A store of value (20% for institutional investors/43% for other beneficiaries)
Portfolio diversification (28%/30%)
A hedge against inflation (4/0)
Hedging against banking infrastructures (12%/15%)
A reserve currency (12%/6%)
A medium of exchange (16%/3%)
Venereal disease (à la Charlie Munger) (8%/3%).
Institutional investors voted predictable favorites, with most viewing bitcoin as a store of value and portfolio diversifier and a handful viewing BTC as a hedge against banking infrastructure, reserve currency and medium of exchange .
However, only 4% of institutional investors and none of managers viewed BTC as an inflation hedge, dismissing the trope advanced by TradFi analysts, crypto insiders and the media in 2021 and 2022. Who would have thought that would BTC as a hedge against inflation garner fewer votes than Charlie Munger’s metonym?
For our last question, I asked, “What investing theme are you most excited about over the next 12 months?” And the responses from both groups were again optimistic: institutional investors and managers chose tokenization of funds and/or real assets as their top choice (52% and 52%). Surprisingly, at least for me, 20% of institutional investors and 24% of managers chose “long BTC/ETH”, while 16% of institutional investors chose “game”.
I will admit that this survey was less than scientific and biased: participants chose to attend Consensus and accepted invitations to these private sessions, so this is a self-selected group. Still, his overall optimism bodes well for the crypto industry and crypto investing, but provided U.S. state and federal regulators reach a consensus that, borrowing a term from crypto buffs environmental policy, be noisy, long and legal.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.