November 2021

The institutional investor’s interest in digital assets — a unique asset class that includes Bitcoin, stablecoins, and a plethora of other forms of digital “tokens” — has soared in recent months, as has their price action. In 2021, the market cap of digital assets increased by 300 per cent, reaching more than US$ 3tn in Nov ‘21. Bitcoin, the most prominent digital asset, achieved a new high in Nov ’21, surpassing US$ 69,000 per unit.

What is driving this value expansion, and what is the next step for institutional investors? Many institutions are rapidly developing their presence and expertise in various forms of digital assets.

Digital assets provide exposure to innovative technology, they have a high potential for upside, they are largely uncorrelated to other assets, they are free from government interventions, they provide a hedge against inflation, because of market inefficiencies there are always arbitrage opportunities and they enable sophisticated institutions to dip their toes in the DeFi ecosystem.

In our May ‘21 newsletter, we highlighted how Microstrategy, Square, and Tesla* were early adopters of the Bitcoin buying trend and have a total of ~165k Bitcoin, worth US$ 9bn (as of 28th Nov ‘21) on their balance sheets. They were joined by BlackRock, J.P Morgan, SkyBridge, Goldman Sachs, BNY Mellon, Mastercard, Morgan Stanley, Visa, and PayPal, all of whom are either trading, investing, or providing digital asset support in 2021. At this point, it would be remiss to not mention the integrations from tech giants like AWS, Salesforce, Google, IBM, etc. However, we shall restrict the scope of this newsletter to the rise of institutional investors in the digital assets market.

TRACKING INVESTORS

According to a Fidelity Digital Assets survey, seven out of ten institutional investors worldwide, including advisors, family offices, pension funds, hedge funds, and endowments, plan to buy or invest in digital assets within the next five years.

Outside of the big financial institutions listed above, financial advisors, family offices, pension funds, hedge funds, and endowments, are taking exposure to digital assets in a big way. Currently, these investors can either invest in public or private markets.

Currently, at US$ 2.5tn this asset class is still relatively small and has room to accommodate more institutional capital. Market volatility, lack of market depth, limited institution-grade asset custody, and brokerage solutions, concerns around regulatory clarity are barriers to adoption.

MATURING MARKETS

Futures have been around since the 1700s, and in the US, the Chicago Board of Trade was established in 1848. However, it has only been two decades or so since the average investor has taken exposure in future contracts. The advent of electronic trading made the contracts liquid and different contract sizes (full, mini, and even micros) lowered the barrier to entry for smaller traders.

Another market that has been around for a while (earliest evidence dating back to 259 BC) is the foreign exchange (ForEx) market. However, there is no central authority that controls the market (a flavour of decentralization in traditional markets) and it took a while before ForEx was opened up to the general public. It was only in the 2000s that average investors developed confidence in the liquidity levels and market rules to make it actively traded.

It takes time for markets to mature. Digital assets enjoy the progress that has already been made in e-trading technology. Exchanges like Coinbase, Binance, CoinDCX are offering advanced tools for users to analyze their trades. Traders like Woo and Eric Crown are leading the way in trader education and nuanced analysis metrics. Organizations like Robinhood and PayPal are enabling mainstream users to participate in digital asset markets. Furthermore, as discussed above, futures, options, ETF/ETPs, and token trust are regulated financial vehicles for investors to take exposure to the blockchain ecosystem.

IMPROVING INFRASTRUCTURE

We see the development of institutional-grade infrastructure which can support traditional organizations getting into the digital assets ecosystem.

We spoke with Tuhina Singh, CEO at Propine who shared insights about the company’s experience with institutional investors over the past 2+ years:

“Institutional investor demand for digital assets is rising exponentially now. Mainstream financial institutions are racing to provide research coverage and set up trading desks in response to the massive demand spike they have seen in the last 18 months. However, they are still far behind what is required.

The institutions and investors want access to digital assets, but also want to be handheld in the process. However the traditional financial advisors are unable to support them fully since the tools and infrastructure they are used to, are not integrated with the crypto ecosystem as yet.

For the most part, the crypto ecosystem lies squarely outside of the legacy /traditional financial systems. The need of the hour is creating the bridges between tradFi and DeFi in a seamless, convenient, and safe manner. Wrappers like ETF on crypto are an example of creating such accessibility in a tax-efficient and compliant manner.

Propine has also set up institutional-grade custody, prime brokerage, income generation, and investment banking solutions that allow access to DeFi world through a regulated window. Such solutions take regulatory, taxation, and security risks out, providing a well-understood framework for investment in the fastest rising asset class in the world.”

Disclaimer: Woodstock is an early investor in Propine.

REGARDING REGULATIONS

The US policymakers are seen as thought leaders when it comes to financial market regulation. Like many other financial markets, there is significant jurisdictional overlap between the SEC, CFTC, FinCen, OFAC, and OCC. All of these bodies are moving forward to regulate digital assets in their respective areas of authority. There has been a flurry of reports, statements, and interviews from different agencies and actors:

A ‘Demystifying Crypto’ hearing was held before the Joint Economic Committee (JEC) in Congress. It was aimed at educating the members on digital assets and current regulatory issues.
The President’s Working Group (PWG) released a report on stablecoins. It calls for stricter criteria for stablecoin issuance. Christopher Waller, a governor at the Federal Reserve has objected to the push to reserve stablecoin issuance for banks.
A ‘Crypto Guidance’ was released by the Financial Action Task Force (FATF) which contains clarifications on how NFTs and DeFi should be viewed by the government. There has been sharp criticism over the proposal to apply VASP standards to DeFi and the body is absorbing industry feedback.

Progressive legislators like Michael Hsu, acting Comptroller of Currency, are advocating for consolidated supervision. He proposed that a holistic agency should be empowered to oversee regulation over all branches of law that might not fall under traditional lines of supervision.

WRAPPING IT UP

Blockchain technology is reshaping how the world views money and economic concepts, resulting in much-needed innovation in financial markets, and regulators across the world are taking cognizance of this fact. Because of the rapid growth of the digital assets sector and the fact that we do not yet fully understand the nature and risks of the ecosystem, enacting regulations in this area is a mammoth task, but we are hopeful that with recent conversations and actions by regulatory bodies, we will soon have a legal framework around this new era of the digital economy.

Raghu Yarlagadda, CEO at FalconX shares why we are at an inflection point and the crypto economy is here to stay:

“The institutional adoption of digital assets first started with Bitcoin, leveraged as an inflationary hedge during early 2020. The narrative matured over time to include balance sheet optimization, portfolio diversification, alpha generation, and early participation in tokenization – validating that digital asset adoption is going mainstream. To put this in perspective, in Q3 2021, more than 300 funds deployed over US$ 8.2bn across CeFi, DeFi, Infrastructure, and NFT projects. We are at an inflection point and the crypto economy is here to stay”

WOODSTOCK ARTICLES

BICONOMY – Investment Thread

Biconomy’s relayer infrastructure is a simple Plug and Play for developers. The SDK is extensively used by a diverse range of dApps across DeFi, gaming, social media, and blockchain wallets to improve the User Experience. We recently shared a Twitter thread on why we invested in Biconomy. Read more

POLYGEN – Investment Thread

Polygen team is building a decentralized launchpad for the Polygon ecosystem – a permissionless way to list projects at fair value. Polygen aids fair access & opportunities for crypto projects to conduct efficient & transparent fundraising without restrictions. We recently shared a Twitter thread on why we invested in Polygen. Read More

WOODSTOCK IN NEWS

We host a webinar series on “Demystifying Digital Assets” to bring you up to speed with this nascent asset class and explain why you should consider adding exposure to this space. You can register for our next webinar.
Prashanth Swaminathan, Partner and Head of Institutional Business at Woodstock Fund, shared his views about the global push towards digitization with Financial Express.
Himanshu Yadav, Founding Partner of Woodstock Fund, shared his views on the NFTs in India with Fortune India.
Woodstock partnered with Polygon Hackathon – BUIDL IT to further promote Web3 technology and culture among budding Indian developers.

MARKET NEWS

According to recent cabinet documents, India plans to regulate, not ban digital assets
Apple CEO Tim Cook revealed that he owns some digital assets.
Microsoft launched Mesh for Teams, which will be a gateway to the metaverse for users.
The Story of Ethereum to Become a Movie and NFT Collection.

DeFi

On Nov 30, MonoX (Mono) suffered a cyber-attack costing it around US$ 31 million. In another such hack, BadgerDAO (BADGER) was hit by a front-end attack on Dec. 2, causing over US$ 120 million in losses.
Janet Yellen, US Treasury Secretary, Exempts Non-Custodial Crypto Protocols from New Reporting Standards.
A mistake enabled someone to spend $50,000 to receive $1.43 million of Olympus (OHM) tokens when they should have received far less, according to an update in the OlympusDAO Discord.
Total value locked(TVL) in DeFi climbed to a new all-time high of $276.92 billion on Nov 9 and currently sits at $270.35bn as of Nov 30.

NFTs

Adidas is entering the Metaverse with new Four-Way Collab with brand Bored Ape Yacht Club, NFT comic series Punks Comic, and cryptocurrency investor Gmoney for its latest partnership.
Time Studios to develop Animated Children’s Series Based on “Robotos” NFTs by artist Pablo Stanley.
The National Football League (NFL) has partnered with Ticketmaster to mint tickets of select NFL games as NFTs.