Crypto markets have rebounded nicely over the last few weeks.
I believe one of the strongest drivers of this uptrend is the expectation that institutional investors, such as endowments, pensions and wealth managers, will make a major move into crypto this year.
In order for this to happen, the infrastructure to support institutional investors needs to be built out: custodial services, transfer services, brokerages, etc. We’re starting to see exactly this.
For example, Founders Fund, a very influential and successful venture capital firm, recently invested in a crypto startup called Tagomi.
Tagomi aims to be a broker/dealer in the crypto world and make it easy for institutional firms to purchase large quantities of crypto.
In Germany, VPE Bank, a major securities firm, just announced that it would begin offering clients cryptocurrency trading services.
And finally, a Thomson Reuters survey of institutional investors revealed that 20% plan to start investing in cryptocurrencies.
This is happening all over the world. And I can almost guarantee you the really big players are keeping their plans secret.
For example, in January, it was revealed that Peter Thiel’s Founders Fund had taken a position in bitcoin. Bitcoin spiked nearly 12% on the news. But it turns out that FF has actually been investing in bitcoin since 2012. These guys are good at keeping secrets.
So it’s likely that other big names are already quietly buying in too.
Eventually, however, this stuff always leaks. And once a few huge names reveal they’ve taken a large position, I believe it’s likely there will be an institutional race to get exposure. This could send prices on an upward tear.
Now I’m going to turn things over to our new Senior Managing Editor, Vin Narayanan, for an update on the crypto regulatory front. This was originally published in First Stage Investor, but for those of you who don’t have a subscription, it’s well worth reading his analysis.
Market Insights From Vin Narayanan
Ethereum hit the mainstream press this week when The Wall Street Journal reported regulators are investigating it and other cryptocurrencies not named bitcoin.
The main question is whether cryptocurrencies, especially ones that have had initial coin offerings, are securities that require SEC regulation or commodities that don’t. The Commodity Futures Trading Commission has already ruled bitcoin a commodity.
To no one’s surprise, both regulators and the Journal are late to this party – really late.
Ethereum has been trading since 2014. Ripple, another cryptocurrency that’s caught the eye of regulators, has been trading since 2012. These issues aren’t exactly new.
They should have been addressed by now. Then again, this is the government we’re talking about!
The good news is when it comes to resolving these types of issues, regulators hate picking winners and losers (they prefer the markets and lobbyists take care of that).
So whatever action regulators take, the long-term effect on these currencies shouldn’t be significant. But that doesn’t change the fact that regulation is coming.
We’ve been saying that for quite some time at First Stage Investor, so it shouldn’t be a surprise to you. And frankly, that’s not a bad thing. A good regulatory infrastructure will provide a sense of order and certainty that will allow cryptocurrencies to thrive.
The key word in that last sentence is good.
The reason the internet – especially e-commerce – took off in the late 1990s is the Clinton administration made a conscious decision to take a hands-off regulatory approach. That meant online purchases weren’t taxed at the federal or state level. And companies operating on the internet were given wide legal protections in copyright and free speech lawsuits.
That friendly approach to regulation paved the way for the internet boom. Without that friendly and open regulatory framework, the internet as you know it today wouldn’t exist.
No Facebook. No Twitter. No Amazon. No Netflix. (Some people would argue this is a good thing, but that’s a separate discussion…)
The cryptocurrency world is at the same crossroads that the internet was in 1998. The government has a choice. It could create a burdensome regulatory infrastructure that stifles innovation and growth. But I believe it will adopt common-sense regulations that will allow the crypto markets and industry to thrive.
Typically, governments err on the side of encouraging innovation and growth – especially when existing stakeholders are already on board. And in this case, the list of existing stakeholders is impressive.
Goldman Sachs is a few weeks away from opening its bitcoin trading desk. (Just count all the former Goldman officials who’ve worked either in this White House or the previous one.)
Peter Thiel’s venture capital firm, Founders Fund, participated in a $15.5 million funding round for Tagomi Systems, a company focused on bringing Wall Street-type trading to the cryptocurrency market.
Thiel is the one Silicon Valley executive President Trump likes – and that means a lot right now.
We expect the government to take a pro-growth regulatory approach to cryptocurrencies for these reasons. But we’ll have a better idea on what the government is thinking about on May 8.
That’s when the House Science, Space, and Technology Committee holds its blockchain hearing. In theory, this hearing is about improving supply chain management and battling counterfeit goods.
But rare is the government blockchain hearing that doesn’t address cryptocurrencies. So stay tuned. We’ll cover the hearing for you and keep you posted.
Good investing,
Vin Narayanan
Senior Managing Editor, Early Investing LLC