Institutional investors have discovered crypto.
BlackRock announced last week the creation of two funds to give investors exposure to Bitcoin, following Fidelity’s decision last summer to launch the “Fidelity Digital Funds” index. JP Morgan last month gave Bitcoin a possible price target of $146,000 as the digital asset becomes an attractive alternative to gold.
But Bitcoin is only one use of Blockchain technology. Thousands of other cryptocurrency tokens have been developed over the past few years: Most notably, Ethereum. To offer investors exposure to digital assets like Ethereum, Bitwise launched its 10 Crypto Index Fund last December; anyone can now buy these securities via investment platforms like Fidelity under the ticker “BITW.” Given how established financial firms are embracing Bitcoin, while offering ETFs that cover alternative cryptocurrencies like Ethereum, Chainlink, and Polkadot, is it likely they will invest sizeable positions into Decentralized Finance (DeFi) tokens and lead to widespread adoption?
“I wouldn’t expect to see Fidelity on the frontlines providing services to these newer, untested digital assets,” Nic Carter, Fidelity’s first cryptocurrency analyst who cofounded the VC firm Castle Island Ventures, told Paradox. “Bitcoin is really the main asset that newcomers to the market are focused on. And I think it’ll be a long time until the market infrastructure is created to service other cryptocurrencies. Ethereum would be the most immediate priority for sure, behind Bitcoin. The Bitcoin story alone is challenging to grasp and get comfortable with. Ethereum is even more complex.”
“Bitcoin has something going for it. It’s digital gold. People can understand the argument,” echoed Jeremy Gardner, an early investor in Bitcoin who cofounded the Blockchain betting platform Augur. “With Ethereum, it gets a lot more technical. It’s like, ‘You can create decentralized applications with zero downtime on them.’ That is really the simplest way of explaining Ethereum, and it’s still not easy to explain.”
Despite the complexity surrounding the Ethereum network, and how it has architected a virtual world of decentralized payment rails and smart contracts, hedge-fund firms specializing in crypto are betting on the token and underlining technology. Digital asset firm Grayscale bought up roughly 50% of minted Ethereum coins this year, offering investors exposure to the cryptocurrency through its fund without having to purchase the tokens through exchanges like Coinbase. Some private wealth advisors are even recommending clients with a higher risk tolerance to allocate a small amount of their cryptocurrency positions (usually about 5% of their investment portfolios which consists primarily of Bitcoin) to Ethereum.
“Ether is great. I love it because it utilizes smart contracts and is the backbone of DeFi,” Angelo Robles, founder and CEO of the Family Office Association, told Paradox. “It’s going to take a while, but that also means it’s where the opportunities lie if you’re willing to accept the volatility and some governmental type challenges.”
The 2017 crypto bull run that saw Ethereum’s meteoric rise to $1,419.96, and sharp regress to $83.73, was defined by initial coin offerings (ICOs). The market was highly manipulated by cryptocurrency project founders who selectively released large bags of alt-coin tokens to cause their prices to rise and fall; a model still at play today, though carefully under surveillance by the SEC.
“What’s different about this market is that Bitcoin really is the focus this time around, whereas in 2017 a lot of the energy was spent on token sales, on ICOs, and new smart contract protocols and forks of Bitcoin. There’s failure in that space,” said Carter. “That was something that the market learned. The SEC punished and went after a lot of the issuers of these ICOs because functionally they were unregistered securities offerings. And then a lot of the Bitcoin forks completely flopped. They failed to gain any traction.”
With stricter securities laws and fines given to bad actors (the SEC fined Telegram $18.5 million earlier this year for issuing its TON token without proper registration), Carter anticipates there will be less cryptocurrency releases and grandfathered-in projects will become market leaders that will continue attracting the interests of larger investment firms. He also notes that tokenized equity, wherein companies release their shares via cryptocurrency tokens residing on public blockchains, will be more compelling for investors.
“Maybe the tokens are cash flow credence, maybe the tokens look and feel more like equity, and they give you governance rights, and they have a dividend associated with them,” continued the investor. “That to me is in a different category from a generic cryptocurrency. To me, that seems more like equity on chain. And undoubtedly, that is going to endure, because there’s clear demand for that.”
Disclosure: The author of this piece and publisher of Paradox Politics owns Bitcoin and Ethereum.