Name: Where investors are placing bets in the crypto economy
Uploaded: 2021-07-28
Duration: 9 min 30 s
Description: SEC clarity is still murky, but there are some plays investors can make.

SEC clarity is still murky, but there are some plays investors can make.

Where investors are placing bets in the crypto economy

The_Ledger

today, there's a general appreciation amongst investors that digital currencies are in fact an entire asset class. And so while investors usually are making their first foray into this ecosystem by investing in Bitcoin or a serie um they're now looking to other use cases and other protocols. In recent years, we've been seeing a diversification of the avenues by which people um and companies, individual investors and institutional ones are able to increase their exposure to the Cryptocurrency sector to market that investors are becoming increasingly more comfortable with. We're seeing uh institutional investors, uh you know, pour money into venture capital funds with dedicated crypto investment vehicles like injuries and Horowitz with their in recent $2.2 billion fund. They're seeing a lot of robust demand uh for crypto investments. And so they've responded accordingly and and launched a third crypto fund this year, it's the largest ever of its kind and recent Horowitz crypto fund three, it's our obviously our third crypto fund. Kryptos really grown and so we're not just looking at picks and shovels cos we're not just looking at financial use cases. We're now into a whole brave new world of what crypto means. And um there's just a really vast and rich development ecosystem that we're seeing right now. The future applications that I'm most excited about is that really we think Crypto provides an alternative two big tech right now and I think that any centralized service will be decentralized because now we know that that's possible with technology. Of course there are scalability and performance issues still. But I think it's really important not to judge the current state of innovation as the end state of innovation in crypto. If crypt has proven anything, it's that the pace of software innovation happens really rapidly. Folks who are, you know, investing in the sector, the folks who are managing funds that are invested in the sector, the investment managers and advisors, they're hugely optimistic about and they believe in it wholeheartedly. We're seeing up to a trillion dollars invested in crypto assets globally. Now we're seeing companies and investment managers apply for crypto E T. F. The notion of having an sec regulated investment product is really appealing. We see that for crypto funds like the Grayscale Bitcoin Trust, which is an sec reported company now, it's traded on the secondary market over the counter. So there is a means by which retail investors can gain exposure to it. But it's still difficult. Investors need to figure out where to buy crypto how to transfer it, how to store it, and how to safe keep it. And in contrast to that, investors can simply buy shares of Grayscale Bitcoin Trust to get Bitcoin exposure. And so for investors looking to gain exposure to Bitcoin right from their brokerage account. Grayscale Bitcoin Trust gives them the ability to have that exposure right alongside stocks, bonds and any other assets that they may invest in today. It holds about 3.5% of the outstanding Bitcoin supply. It is solely and passively invested in Bitcoin, the Bitcoin futures that we're seeing being pitched before the Security and Exchange Commission these days, a lot of respects. They're similar to any E. T. F. Or fund that's backed by a commodity like gold E. T. F. For example, a Bitcoin TTF would hold Bitcoin and allow investors to increase their exposure or gain exposure to cryptocurrencies like Bitcoin through investing in that E. T. F. But in lieu of that we've already seen in recent years, investment managers launch products, E. T. F. That focus not on cryptocurrencies themselves, but on um companies and industries and sectors that um themselves are exposed to to crypto and Blockchain amplify as one investment manager. Um They have any T. F. That dedicated towards Blockchain exposed companies and sectors they invest in exchanges like Coinbase, they invest in crypto miners who are hugely important part of the market supply chain. They invest in companies that hold crypto on their balance sheet. It just goes to speak to the overall diversification in the various ways in which investors are looking to increase their exposure to the sector. There's just a really vast and rich development ecosystem that we're seeing right now. We're seeing a lot of different companies um come on the scene and not even companies, what we call projects increasingly, we're seeing crypto projects that we're investing in. We are taking a long term view, kind of call it a 7 to 10 year investing horizon. Um For our for the investments we're making in crypto, people are still looking for the ways in which this technology and these technologies can really be deployed in real world use scenarios. Anybody who's followed the crypto sector would say is kind of the the albatross that hangs over the sector. The notion that, you know, how are what are the avenues by which you can deploy these technologies in the real world? You're seeing financial services use cases emerge and increase in much the same way that different applications were built on top of internet protocols. I project that we are going to start seeing applications built on top of crypto protocols. And that's really exciting. Again, we're already seeing some of that with the intersection of gaming. Um consumer platforms. Again, we're starting to just see the beginning of what I call D so or decentralized social platforms. And really anything centralist can be decentralized. That's really the innovation of crypto defy or decentralized finance. Our cohort of protocols that represent traditional financial services meeting decentralization. We continue to see protocols merge within defy emerged around gaming emerged around file storage. And these are all establishing new use cases for digital assets that investors wouldn't have even dreamed would be possible as the asset class has evolved today, there's over $50 billion of total value locked within the defi ecosystem. And we look at that as a measure of how much capital, how many assets are built into defy protocols and are being deployed into those protocols for the services that they provide defy is a very new and emerging area within crypto, the grayscale, decentralized finance or defy fund. His comprised of protocol of that in a decentralized fashion provide services like exchange lending and borrowing and other services that were typically used to getting from banks, brokerage houses and other financial services players. One thing, if you talk to people in the investment and the difference between a closed end fund, like what Grayscale has and a crypto E. T. S like, um what Grayscale wants to make the grave scale Bitcoin Trust or what ark invest looked to launch recently or what scores of other companies have looked to launch these funds, closed end funds. Often they can trade at a discount to their real underlying asset value. That's an issue that you don't see so much with with any kind of E. T. F. You know, the underlying value of the asset very much is what it is and and trades as such on the open market. The hope is that E. T. F. S. Will make crypto investing more accessible to ordinary retail investors, as well as major institutions who want to pour money into index funds uh and gain exposure that way. It's just various avenues by which folks can gain exposure to the crypto sector. But it's difficult. Some are easier than the others, and the notion of having an sec regulated investment product is really appealing. There is this myth out there that people who are found in crypto projects or designing protocols really just don't want any kind of regulation or oversight at all. And I don't think that describes the vast majority of crypto founders that we see it injuries. And Horwitz, The crypto founders. That we see really what they want is regulatory clarity. They don't want to have 100 different agencies with conflicting rules. And when I say 100 different agencies, I don't really just mean in the US I mean globally and so I think one of the things that needs to happen for further mainstream adoption is some regulatory clarity. We think that regulatory clarity will actually encourage mainstream adoption further and it's good for business. Nobody really knows when the FCC will uh proceed with some kind of guidance on crypto BTS or or other kinds of publicly traded kind of investment vehicles in the crypto sector. Um Some folks think it might happen before the end of the year. Some people think it might happen next year. Some folks think they won't move on it at all and sideline it because they don't have confidence in their ability to regulate it in a way that would protect public market investors from some of the pitfalls of investing in cryptocurrencies, some of the manipulation, maybe that could be that could be prone to. There is an entire industry right now that has already grown up around um kind of regulation. And I'll give you one example is companies like chain analysis for example, it's now a valued at $4 billion dollars in channels. This is just one company. There are a number of others like it and they have government contracts with governments all over the world to help them to transaction monitoring and ensure that I am L. And K. Y. C. Laws are being followed. While the U. S. Doesn't allow crypto if other countries do, namely our neighbors to the north Canada does allow regulated crypt WTF. They not allowed the first ones to launch earlier this year. We're seeing other countries give the green light for investment vehicles like crypto TF. It's just a matter of whether the sec follows suit and whether we see them in the U. S. Because obviously we have among some of the largest exchanges in the world, the the largest companies in the world, a huge pool of investors willing to poor liquidity into some of these assets, so gaining that regulatory guidance on the public markets from the would be a huge step.