The Drip #8
In today's Drip, we want to talk about the inclusion of institutional investors in cryptocurrency and what it means for the future of crypto. There are many avenues for Wall Street to gain exposure to crypto and for Wall Street to create broader on-ramps for traditional investors who also want easier access to crypto.
18 months ago, talking about institutional demand for crypto was wishful thinking. Now, however, we can barely keep up with all of the traditional finance articles about institutions, private wealth funds, sovereign funds, and more that are gaining exposure to crypto.
Let's dive into the backdrop of institutional demand.
The financial system in the United States has developed serious problems that has been rearing its head since the early 2000's.
The private and public debt burden, globalization, retirement crises, credit crises, and technology eating up jobs. Without fiscal stimulus, rate cuts, QE and other Federal Reserve and Central Bank tools, these problems would have devastated the United States and the world during the Great Recession (2007-09) in much more substantial ways than it did.
Covid-19 became an event that allowed the Federal Reserve to implement these same tools under the guise of a global pandemic, also potentially becoming the catalyst for possibilities like deep inflation, hyperinflation etc.
While inflation will most undoubtedly take its toll on the broader public, a period of hyper-inflation is not very likely. This sentiment echoes what happened in the Great Recession, in which the Fed spearheaded years of quantitative easing (i.e. money printing and rate cuts) that left the public shouting for hyperinflation.
Yet it never came. Why?
During times of uncertainty, people tend to hoard up cash and save for an eventual downturn in which they can purchase goods and assets at cheaper prices, thereby actually creating deflation (because now consumer prices need to be lowered to incentivize consumers to purchase).
The Fed realized they could capitalize on this phenomenon by increasing the M0 supply (monetary base) and not the M2 supply (broad money – circulating supply) by expanding the Central Bank and Fed balance sheet to eat up toxic assets and fabricate a healthy portfolio, boosting confidence.
Thus, hyperinflation never came. Central banks have been paying off those loans back to the Fed ever since and all that money printing never made its way into the real economy.
Currently, in our economic environment, we are injecting about a million dollars into the financial system every second. This is the cause for such worry. However, as long as the Fed balances the right amount of measures, they can stave away such things as hyper-inflation, deflation (which I think is worse), and stagflation.
As long as jobs are increasing, Central Banks are buying government bonds at near-zero rates, and the Fed is buying up treasuries and mortgage-backed-securities, our economy can artificially stay afloat without drastic changes in the CPI (consumer price index).
This is why the infrastructure bill has to be passed, and likely will. This all seems fine, but what is the downside?
The downside is that the financial system has more power than ever before and all of its constituents — creditors, bankers, corporations, and fund managers — are becoming vastly more rich than you can imagine, and widening the wealth gap at mind-boggling rates.
This is because central banks are incentivized to lend money to corporate banks at low interest rates, who then lend to corporations, who then use the near-free liquidity to purchase stock-buybacks, inflating prices artificially.
People who own real estate, middle and upper class, get to take advantage of increasing housing prices because the Fed is propping up the RE market via MBS purchases (100-120 billion dollars a month).
And guess what? It isn't just low and middle class individuals getting screwed, it is entire countries who don't have enough economic output to sell bonds during times of QE when rates should be lower. This means that bond purchasers, like the constituents I mentioned above, force poorer countries to pay higher interest rates in compensation for the risk they take on.
This means higher output countries get to take advantage of lower wages during non-linear times of QE. So, in essence, people who have money or assets get to take advantage of asset inflation while people who don't inversely have stagnant wages and higher real debt burdens as existing loans that were priced pre-QE are harder to pay off with a less powerful dollar/currency.
This pushes the rest of the of the economy to seek high-risk assets in order to just stay solvent or (God-forbid) on pace to retirement.
Why Institutional Demand, Then?
The realization that the world's financial system is slowly capsizing, and is taking on more water than governments and banks can bail out, is animating itself in the emergence of crypto.
It is with historical certainty that fiat currency regimes are failing, and more rapidly than ever before. With that being said, I don't see the current system failing any time soon — especially with upgrades coming soon like CBDC's and ledger-based payment rails/networks.
Crypto, at its core, is a reallocation of trust — moving from people to math (in the form of cryptography ensured blockchains).
Institutions make their wealth from being the middleman in every transaction you can think of. It's in their interest to take advantage of this narrative shift as it is inevitable. Even legacy financial institutions, the most powerful entities in the world, cannot stop innovation. Their forced participation in this revolution will spark a new paradigm of the way the world transacts value, and will reshape the way we interact with each other in its most fundamental way.
We are still in the early innings of this ball game with a lot of ball left to play.
Over the years, crypto alongside Bitcoin has garnered massive negative attention from legacy financial incumbents like Jamie Dimon, Peter Schiff, Warren Buffet, and Charlie Munger. Most of them though, have already capitulated and began embracing crypto and Bitcoin. See picture below:
I see this being a trend to continue over the next few years. Soon ETFs, retirement funds, pension funds, private wealth funds, sovereign funds, insurance funds, even central bank's will either provide services for crypto custody, or outright gain direct exposure.
In the latest rounds of 2021 earning reports, major institutions and companies revealed that their lack of exposure to Bitcoin and digital assets were a direct cause of their funds under-performance (see our Monday's Market Outlook #4).
Remember, institutions have a lot more barriers to entry when seeking exposure to new assets. For instance, appealing to ethics committees, following guidelines set by a company's or fund's board, and making absolutely sure that data projections are skewed in their favor.
These institutions need to be made sure that their corporate treasury or their investment fund performs well, or the value of their own company will deteriorate. This is incredibly validating when you see the level of adoption taking place, and knowing that we are still in the early stages.
Blockchain and a New Trust
While financially beneficial for the world, crypto is not just about financial inclusiveness. Blockchain, the technology that underpins crypto, can be used for anything you can think of while still holding true to the core crypto philosophy: the reallocation of trust.
Currently, the focal point for crypto adoption, from the user's perspective, should be taking advantage of an alternative financial ecosystem that either levels the playing field in the conventional financial world, or replaces it entirely.
Either way, by taking advantage now, you will be in a much better position in the near future. With that being said, as time moves forward, the focal point for crypto adoption will change. Like I said, blockchain can be utilized for many different things: supply chain upgrades (trillion dollar environment), AI (trillion dollar environment), identity solutions (multi-billion dollar environment), data sovereignty (unknown valuation).
As technological innovations continue to progress exponentially in the non-crypto world it will become resoundingly clear that those innovations will be exponentially better off running on a blockchain-based protocol. This will provide inclusiveness, incentive structure for proper governance models, and framework security and immutability.
Hopefully, by now, you can see that crypto is inevitable. It is the opportunity to opt-out of one of the most corrupt experiments in history. By doing so, you not only force installments of the legacy world to play the game, but you force them to play the game on even grounds.
If you want your chance to secure a future on your own terms, this is it. If you fail to adopt this emerging paradigm, and decide to participate after institutions have laid their claim, you will again be disadvantaged. This is an opportunity, not a charity. Take advantage now, or miss out on the greatest distribution of wealth in favor of the people, and not the elite.