Some thoughts on institutions and crypto
Why are traditional investment managers so slow to adopt crypto?
There are a couple of reasons why we haven’t seen massive adoption of digital assets yet from large investment management institutions and my guess is that we likely won’t see any for a couple of years. In my opinion, there are three simple reasons: 1) Lack of demand, 2) Lack of expertise, 3) Bad risk/reward.
- There hasn’t been widespread demand from client to gain exposure into cryptocurrencies. First and foremost, large investments management firms are often held at the mercy of their clients’ asset allocation decisions. They do not have the ability to willy-nilly allocate into cryptocurrencies just to chase returns. While some funds may have discretion to invest in various alternative products, they likely still need to discuss with their clients and gain their approval prior to entering into this market.
- Lack of expertise investing in cryptocurrencies. This is a completely new asset class with its own characteristics, and no one has experience investing in these protocols. There aren’t agreeable metrics like P/E, DCFs, Free Cash Flow, etc. to properly assess cryptocurrencies. New products/strategies often need to be incubated for a couple years to allow the investment team to build a track record that they can lean on later when they start raising funds. This means that an investment management firm will likely need to gain expertise from internal hires (which they probably don’t have) or hire externally, which is expensive — this ultimately leads to problem #3.
- With crypto still being a relatively small asset class, the risk/reward is not there yet for larger firms. Investment management firms are like all other profit-seeking entities. They are looking to sell products that bring in the most revenue. Given the small size of the entire cryptocurrency ecosystem and the fact that most cryptos probably don’t even have the necessary liquidity to handle what would be massive flows, you’re likely looking at a much narrower selection of investable cryptocurrencies. This ultimately limits the size of the fund and revenue. Internally, these investment management firms often have limited opportunity to present various ideas and approaches in front of their prospective clients, so…would you have better luck selling a multi-billion dollar growth equity fund with a strong track record, in an asset class that people already understand, or…would you spend that opportunity pushing a $150 million dollar crypto-fund that you don’t really have expertise managing, in an asset class that most people don’t even believe in yet?
My take here is that all of this will need time. Cryptocurrencies are very promising, but the industry is still immature and there are many problems that have to be solved. With more time comes understanding and with understanding comes trust in the asset class. I’m excited to see where this will all go and glad to be a part of it as well.
Please provide any feedback and thoughts, I always appreciate hearing a different perspective.