Buy Side Getting More Comfortable with Digital Assets

The recent drawdown in Bitcoin and the crypto asset economy hasn’t scared institutional interest, according to Thejas Nalval, Co-Founder and Chief Investment Officer, Parataxis Capital, a multi strategy actively managed hedge fund that operates solely in the cryptocurrency world.

“I think the institutions have spent the broader part of the last 12-18 months really developing a thesis, not just around Bitcoin, but around the whole economy. And I think they’re at the tail end of these developments, and they’re actually looking to deploy [funds]. So in our view, the events of the past six- eight weeks have actually sped up certain discussions,” he said during “Shining a Light on Digital Asset Markets 2021” conference hosted by The Association for Digital Asset Markets (ADAM) and Eventus. 

However, Brad Koeppen, Head of Trading, CMT Digital, doesn’t feel that institutional clients are fully educated, saying that it’s difficult for anybody to ever be “fully educated on crypto”. 

“But I’ve seen a big shift, where people have been saying institutions are coming for the four years that I’ve been involved in the space. And I think those institutions have just looked different over time,” he said. 

He added that a lot of that has to do with the infrastructure, where four years ago there wasn’t a lot of institutional-friendly infrastructure.

“I think that infrastructure has allowed people to be more comfortable with how to engage, how to gain access, how to get exposure, and throughout that time, I think that they’re continuing to educate themselves, and it’s just sort of lowering the barrier of entry,” he said.

Nalval agreed, saying that the infrastructure is getting better.

“So the ability for an institution to deploy a meaningful allocation to the space, which may have been a very difficult thing to do a few years ago, it’s much more palatable today,” he said.

Andrew Ridenour, Counsel and Strategic Advisor, Cumberland, said: “We’re starting to see a lot of uptick among institutions that are looking for more synthetic exposure, effectively ways to get the price exposure without having to worry about the custodial issues.”

From the legal side, a lot of these are going to probably take the form of derivatives, he said.

Cumberland has recently executed block trades with Goldman Sachs, helping them managing the exposure for their client base. 

“We’ve definitely seen a very big uptick among the banks looking to provide their buy-side clients with access to the market,” he said.

“A lot of this might wind up taking the form of either block trades for the futures or most likely movement towards non deliverable forwards,” he added.

Koeppen thinks that regulation is probably still one of the biggest risks in the industry. 

In the US, there are two primary market regulators, the CFTC and the SEC, and they have various specific mandates.  

“And somehow, crypto, and Bitcoin in particular, falls right in between the two of them. It’s a pretty interesting doughnut hole between the two agencies,” Koeppen argued.

He added that there’s this interesting dynamic of over regulation in one geography, which tends to benefit other geographies, “because people are going to figure out how to engage based on their investment thesis, investment parameters, based on where they’re domiciled”.

Meanwhile, Nalval thinks the regulatory landscape in the US is more clear than it was even just three – four years ago: “It makes our lives easier to know what the clear boundaries are opposed to being ultra conservative all the time.”

In terms of the individual assets, that people are trading, Ridenour thinks that everybody is still in active dialogue with the SEC and trying to understand, which assets are considered securities versus which are non securities. 

“That definitely impacts the ability of US investors to access those assets. But think if you’re in the US, you’ve got the CFTC and the SEC, and it’s kind of tough to get around that,” he said.