Far from being “rat poison squared” – a term used by Warren Buffet to describe Bitcoin – in a “surprising” turn of events, cryptocurrencies have now emerged as an institutional asset class in their own right, according to a rather bullish report by banking giant Morgan Stanley.
In an update to a previously published report, titled “Update: Bitcoin, Cryptocurrencies and Blockchain”, Morgan Stanley’s research department has touched on a variety of crypto-related topics; here are the main highlights:
Influx of Institutional Investment in Crypto Industry
Referring to the “rapidly morphing thesis of Bitcoin”, the report states that BTC and its peers have gone from merely serving as “digital cash” from 2009-2016 and an “incumbent financial system antidote”/“replacement payment system” from 2010-2017, to a “new institutional investment class” from 2017 onwards.
The report notes that there has been an influx of institutional money in the crypto space, with the number of institutional investors rising while the number of retail investors remains stationary. There has been a surge in the number of crypto-tied futures products and crypto-related funds – according to Morgan Stanley’s researchers, the amount of crypto currently being held by hedge funds, venture capital firms, and private equity firms comes up to a total of $7.11 billion.
In addition, the report points out that big players have also forayed into the crypto space, mentioning examples such as Coinbase’s recent fundraising round and $8 billion valuation, massive investments by big players such as Goldman Sachs and Galaxy Digital in BitGo and Binance, and Fidelity’s digital asset services. Crypto companies are also actively collaborating with institutions – e.g. the Winklevoss twins’ Gemini Trust bringing Nasdaq on board to conduct market research.
Despite these positive developments, the report noted that there are currently three key factors holding back further institutional investment: regulatory uncertainty, the absence of big/prominent financial institutions and asset managers in the space, and the lack of a reputable custodian solution.
The Rise of the Stablecoins
The report also touches on the trend of stablecoins, which is another interesting development in the crypto space. Stablecoins, as opposed to regular cryptocurrencies, are backed by assets such as fiat currencies, or other cryptocurrencies, and resultantly exhibit very low volatility (hence the name). According to the Morgan Stanley report, the emergence of stablecoins has contributed to the current bear market by diverging investments away from volatility digital assets like Bitcoin.
ICOs Down, STOs Growing in Popularity
Owing to the regulatory crackdown on the cryptocurrency market, and the subsequent bear market that has followed, initial coin offerings (ICOs) – an immensely popular form of crowdfunding for startups and new projects – have dwindled and are now failing (although analysts believe that they are unlikely to drop to zero). According to the report, with ICOs being forced to liquidate their funds, the market is displaying a move towards security token offerings (STOs). However, the regulatory environment is still not mature enough for security token offerings and their subsequent listings on exchanges.
The report also discusses regulators’ statements on digital currencies, observing that while they do seem to be warming up to crypto, they remain somewhat uneasy and stress the requirement for appropriately classifying cryptocurrencies and developing a clear and solid regulatory framework which will ensure that crypto can be traded safely and within legal limits.
The report also highlights CFTC chairman Christopher Giancarlo’s bullish stance on cryptocurrencies:
“I personally think that cryptocurrencies are here to stay. I think there is a future for them. I’m not sure they ever come to rival the dollar or other hard currencies, but there’s a whole section of the world that really is hungry for functioning currencies that they can’t find in their local currencies. There’s 140 countries in the world, every one of them has a currency. Probably two-thirds are not worth the polymer or the paper they’re written on, and those parts of the world rely on hard currencies. Bitcoin [or any other] cryptocurrency may solve some of the problems.”
Benefits of Blockchain
Morgan Stanley’s analysts also gave blockchain technology their stamp of approval, praising the technology for its various benefits and applications (the bank has also been using DLT itself, since 2016). According to the report, the technology lends itself well to areas such as cross-border transfers, B2B transactions, reinsurance, and shipping and trade finance. Banks across the world, such as ABN Amro, Deutsche Bank, Bank of America, Wells Fargo, JP Morgan, Citigroup, Goldman Sachs, and HSBC are currently testing the various use cases of blockchain tech.
However, the report also highlighted a number of drawbacks of blockchain tech and cryptocurrencies, such as electricity usage – the team’s analysts predict that the falling prices of mining equipment will lead to increased electricity usage. In addition, the report also claimed that AI and blockchain tech are “mortal enemies”, but failed to expound further on how and why the two are incompatible.
The Future of Cryptocurrencies
Overall, the Morgan Stanley report shows that Wall Street is warming up to crypto and this new asset class is here to stay. Morgan Stanley also has plans to offer clients Bitcoin swap trading, but will only do so after assessing institutional demand.
This report, coupled with recent and upcoming developments, such as crypto investments from university endowments like Yale and new Bitcoin futures contract by Bakkt, coming this December, reinforce the staying power of digital assets and we, at BitBull Capital, continue to make the most of these and future opportunities via active management strategies.