It is still very early days for cryptos according to Tom Jessop, head of Corporate Business Development at Fidelity Investments and president of Fidelity Digital Assets.
“What’s interesting when you look at the data, as you might expect, it’s still very much an early adopter market, like the folks that you would look at, and say would tend to be more of the risk taking investors on the spectrum, so the hedge funds, and perhaps the family offices are further ahead than the pension funds and the endowments,” Jessop says.
Fidelity has recently begun offering a bitcoin custody service. “We started with what I’ll call ‘crypto-native’ types — so a lot of crypto hedge funds,” Jessop says.
They’re dipping their toes, seeing whether the water is nice enough to swim. Behind them stand about $2.5 trillion in funds under management. A wholesaler of 401(k) pensions.
“Look, I don’t think that market’s ready for this,” he says referring to potentially bringing in the 401(k) side to crypto. “When you’re talking about institutional liquidity, given that many of these exchanges have effectively retail order books, the price impact of big, institutional orders into a framework like that can be significant.”
The combined market cap of all cryptos and tokens currently stands at about $140 billion. That’s one publicly traded stock company. It’s just 10% of Apple shares.
The global stock market by comparison is $100 trillion, making cryptos 0.1% of it. Then you have the gold market which is some trillions, housing of course, bonds, and so on.
In many ways cryptos are tiny fish in that big picture where we’re talking of $2.5 trillion to be “spent” somewhere with the hope of making a return.
Interestingly, however, some early adopters among institutional investors have already moved some of their funds, probably tiny amounts in their overall balance sheets, towards cryptos:
“We just completed a survey of about 450 institutions, so everything from family offices to registered investment advisors to hedge funds. It’s interesting, I think about 20% indicated that they currently allocate to digital assets with an intention to grow that…
Of the folks they allocated, they will increase their allocation on average. They’ll double their allocation over the next five years,” Jessop says.
There have been a number of studies that have shown cryptos have a very unique quality in investing: they don’t correlate with anything.
Such studies are still at a fairly unsophisticated stage, but even from observation one can see sometime stocks go up and cryptos go up, and sometime cryptos don’t care at all what stocks do. Same for gold, or a fiat currency.
The reason is probably because cryptos are global first, but more importantly, because cryptos are a brand new market. To access a stock, you need to register with some broker and if the stock is not listed in your own country then you need to find a broker who has access to that specific stock.
To get some bitcoin or eth, you go to some peer to peer exchange, a decentralized exchange, your local exchange in South Africa or Colombia or you just mine it.
It’s kind of a bazaar but digital and instant and global. Meaning someone in Venezuela might have a different view on bitcoin’s price or usefulness than someone in South Africa, China, Arabia, Europe, Russia or America.
Having a diversifier in an investment portfolio is quite a useful thing to hedge against risks or to obviously benefit from gains, so Jessop says what perhaps is the most interesting thing:
“We’re also seeing, quite frankly, even from the advisor community, interest from financial advisors.”
Financial advisors are sort of the gatekeepers to the entrance of the investment world. They’re presumably the ones who study portfolio theory and all the rest. Their aim is usually not stupendous gains and/or loses, but reasonable continuous gains over years and perhaps decades.
For that they have some rules of thumb. Don’t put all eggs in one basket is a mainstream one. Have different uncorrelated assets is probably the golden one.
If crypto is now on their radar as far as they’re seriously considering it as a potential option, then this space is perhaps at the early stages of moving away from the early adopters market to the mainstream one as far as investing is concerned.
So far what they call retail crypto investors has actually been fairly sophisticated and usually quite intelligent mainly young men and women who obviously are attracted by potential returns but also think cryptos offer a significant opportunity to at the very least upgrade the financial system.
What we might see in the near future is actual retail investors who perhaps don’t have much of a view on cryptos or don’t care about opening finance, but just want a quick answer to say how should they distribute their $10,000 savings. With the financial advisor then perhaps saying that say $1,000 of it should go towards cryptos.
That’s the mainstream stage which this space is perhaps entering. For now, it is clearly still early adopters playground.