The Breakdown - Bitcoin’s Big Institutional Week: JPMorgan Brings Crypto to All Wealth Management Clients & More

Episode Date: July 24, 2021

This week, institutional involvement was revived after the past few months’ inactivity. NLW covers new evidence for institutional interest, including: A billionaire you can’t ignore JPMorgan offering crypto exposure Galaxy Digital’s big bank backers   Elon Musk’s revelation that SpaceX, the space exploration company that he founded, held bitcoin was joined by billionaire Thomas Peterffy’s admission that he holds some crypto, even hinting he sees “a small chance this will be a dominant currency.” On the wealth management end, JPMorgan has opened crypto exposure to all of its clients, a typically conservative set who tend to be passive in their investments. Lastly, London-based digital trading asset venue Galaxy Digital’s big bank backers continues to grow. The latest addition was BNY Mellon.   All this together points to the fact that institutions, no matter how reluctantly, see crypto as an inevitable investment that can’t be ignored. -- Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is sponsored by NYDIG https://nydig.com/nlw/ The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Tiffany Hagler-Geard/Bloomberg/Getty Images, modified by CoinDesk.

So what you have here, then, is a bottom-up client demand trumping the biases of a top-down hierarchy, which I think is pretty rad. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big-picture power shifts remaking our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Friday, July 23rd, and today we are talking some. very interesting institutional Bitcoin and crypto news. It has been a nonstop barrage of FUD for what feels like months. China FUD, Tether FUD, regulatory fud, so much FUD. And I have some bad news.

Tomorrow's weekly recap has even more FUD around regulatory machinations. I figure that's better for a Saturday when your weekend's in full swing and you have more time to process. But today, well, today we have something fun. As you know, there have been some meaningful questions about institutional involvement in the space. This was the narrative that drove so much of the action from Q2 last year to Q2 this year. Now, interestingly, the price run-up was not just spot demand from institutions buying. It was a bit of that, plus a lot of traders levering up and driving the price up in anticipation of those institutions coming in. Basically, traders aren't just betting on fundamentals. They're betting on narratives that they see in the market, and particularly

narratives that seem like other people are also betting on. For a while, that trade was looking fine. Especially Q1 of this year was just announcement after announcement after announcement of institutions coming in. The culmination, perhaps, was Tesla's $1.5 billion treasury bet. In point of fact, though, most of these advancements were less about corporate treasuries and more about trading. In retrospect, a relatively small handful of corporate treasuries, at least that we know about, finalized their allocations to Bitcoin. What there was a lot of, however, was recognition among big banks and traditional firms that they had to give clients access to crypto buying, selling, and custody. Suffice it to say, the enthusiasm around this type of news, not to mention the traders

trading that news, has dampened pretty significantly in the past few months. That whole big positive cycle was replaced with the endless negative news that I mentioned at the top of the show. Now, there have been dribs and drabs of interesting institutional announcements over the past few weeks, but I think it's been fair to ask just how strong that narrative was. This week, however, put some pretty damn good evidence in our hands that institutions not only remain engaged, but that they're quietly making big moves behind the scenes. So, what did we learn? Well, first, there are billionaire allocations. We discussed it yesterday, but it is clearly significant that SpaceX is also holding Bitcoin on its balance sheet, and the company has not divested itself of its Bitcoin during the latest Fudd phase.

It's also significant that Elon vociferously made it clear that he has not sold his Bitcoin. It's also significant that Elon revealed that he also held Eath. And finally, it's significant that his crypto holdings are his biggest holdings outside of his Tesla and SpaceX stock. But Elon wasn't the only Billy Boy dropping hints on their coin stack. Let's talk about Thomas Petrophy. Pedofy started interactive brokers back in 1978. and all of these digital brokerages now owe something to IB, which was one of the earliest innovators in computer-assisted trading. The company remains absolutely massive.

They call themselves the largest electronic trading platform in the U.S. by the number of daily average revenue trades. Petrfee is now worth north of $20 billion, $21 billion, in fact, which is, you know, 21 Bitcoin, you get it. That said, Petrfey's history with Bitcoin and crypto is one of, fine for you, but maybe don't make it part of our system. In 2017, when CME was about to launch Bitcoin futures, he told CNBC that he had no problem with people trading Bitcoin and crypto, but that, quote, linking Bitcoin and other cryptocurrencies by federal

regulations to the real economy was problematic. Fast forward to today, IB is preparing a crypto offering. Petrfi has said that several of their clients expressed interest in, quote, I completely understand it. But more than that, he said, quote, even I myself have put a little bit of money into crypto because even though chances are, I think that this is not going to be a viable market, I think that there's a small chance that this will be a dominant currency, so you have to play the odds. Petrofi didn't give any more details about which cryptos or what his allocation was, but still chalk up one more of the world's best investors on the crypto team.

I also think as much as we'd like strong, clear, full-throated support of Bitcoin and everything that it can be, there's also something powerful about the, I can't ignore the possibility that this thing is real, whatever my priors are. It almost hits a totally different segment of skepticism in the market, people that you're never going to get to be zealots, but people who feel like they have to be there at least on some basic level. The breakdown is sponsored by Nidig, the institutional grade platform for Bitcoin. As longtime listeners know, Nidig is a major force in the Bitcoin space, and they're now

making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers to offer Bitcoin. That mainstream access is critical for all of us. can learn more about it at nydig.com slash nLW. That's nydig.com forward slash nLW. Okay, so we're starting this week's institutional news with some more billionaire advocate reveals, right? Not bad, not bad. Now, let's talk about family offices and wealth management clients. Wealth management is the practice inside big investment firms where people who have millions of dollars in assets, hand them to investment managers and say, make us more money or at least don't

lose us this money. Clients often have a lot of control over things are allocated to, but in general, you're basically paying someone to make more money for you. This is passive for you, the wealth holder, rather than actively making your own individual bets. Family offices are a slightly different version of this and are usually for folks with even higher net worths. So a family office is more like when you have 50 million plus and want to hire a small team of professionals to manage it. Family offices are a super interesting part of the institutional investor landscape in that, depending on whose assets are in play, they can be either much more conservative or much less conservative and more dynamic. David Nage, who is now over at ARCA, used to

run family office practices and spent a ton of time getting family offices informed on crypto. Well, Goldman Sachs did a survey of more than 150 family offices. Of those, 15% of respondents are already invested in crypto, another 45% would be interested in the space as a hedge around, quote, higher inflation, prolonged low rates, and other macroeconomic developments following a year of unprecedented global monetary and fiscal stimulus. These firms are also, on average, a lot bigger than that $50 million little guy I was mentioning. Of the firms that participated in the survey, 22% had assets under management of $5 billion or more, and 45% saw $1 billion to $4.9 billion. One other really interesting nugget from the survey comes from Mina Flynn, who's one of the leads

at private wealth management for Goldman, and who said that there are many who think that, quote, this technology is going to be as impactful as the internet has been, from an efficiency and productivity perspective. Okay, so now we've got billionaires revealing their holdings. We've got these family office funds interested, but that wasn't the biggest Bitcoin institutional wealth management news. That came from J.P. Morgan. This week, JPM made crypto exposure available to all of their wealth management clients,

and that's a big step. Now, if you're confused why it's a big step, that's reasonable. And what I mean is that haven't these wealthy folks had every ability to just go buy Bitcoin on their own for like as long as retail has? Yes, yes, they have. However, JPM wealth management clients are going to tend to represent a conservative set who are more passive in their investments. So this definitely represents the pie of total crypto buyers expanding. On top of just this institutional investor expansion, JPMorgan is also reportedly giving their retail client side wider access to indirect crypto exposure

through the grayscale trust as well as the Osprey Bitcoin Trust. So these clients still can't invest in crypto directly through their JPM or Chase accounts, but they can get these proxies. Of course, what makes all these moves extra notable is the degree to which JPM CEO Jamie Diamond remains vocally skeptical of Bitcoin. So what you have here, then, is a bottom-up client demand trumping the biases of a top-down hierarchy, which I think is pretty rad. Yet still, not done with institutional news for the week. Fidelity Digital Assets released its 2021 Institutional investors' digital asset study. The banner headline is that seven of ten institutional investors surveyed expect to invest in digital assets in the future. More than 90% of those interested

intended to have an allocation in the next five years. What's more, they found that 52% of institutions surveyed across Asia, Europe, and the U.S. already have digital asset exposure. Asia was the highest with 71%, followed by Europe with 56%, followed by the U.S. with 33%. Those numbers in Europe and the U.S. are up from 45% and 27% last year, respectively. So then what's holding the stragglers back? Well, the survey says it's price volatility and difficulty valuing assets. Interestingly, concerns around complexity and market infrastructure are on the decline. For those wondering about the methodology of the survey, Coalition Greenwich produced it on behalf of Fidelity Digital between December 2nd of last year

and April 2nd of this year. It included 1, 1,100 institutional investors in the U.S., in Asia that included high net worth investors, family offices, digital and traditional hedge funds, financial advisors, and endowments and foundations. All right, one last institutional story, and before we discuss this, let's talk Hulu. The late 2000s had seen the beginning of the rise of streaming, right? Netflix was a force and it was clear that television was going to change. In that context, a number of the big media companies said, hey, we should probably compete. News Corp, NBC, Disney all got together to found Hulu. It would aggregate shows from their television networks and provide a hedge to traditional cable subscription revenue. The subsequent history

of Hulu ownership is a complex back and forth, but it was, has, and remains an asset of traditional media companies in the internet era. Fast forward to this week, Pure Digital is a new London-based digital asset trading venue that will start operations soon, and it's not an independent startup per se in the sense of start a thing, go raise some venture capital, grow it, invite some more capital in, etc. Instead, it's being backed from the get-go by a consortium of banks. In April, State Street announced that they would be lending their trading technology to the project, and State Street is, of course, one of the world's biggest asset managers. This week, BNY Mellon announced support for the project as well, so there are now six major banks in the

consortium backing Pure Digital. By the way, founder Campbell Adams used a similar strategy to build a foreign exchange platform in 2014. My feeling is that the exchange space is still wide open, there's going to be lots of room to develop lots of services for different types of clients, and that Hulu proves that sometimes, in spite of themselves, legacy-led initiatives can actually survive the tide of chaotic disruptors. What's notable to me is that these big banks feel obligated to make a play in this space. So, as you can see, quite a bit of news happening on the institutional side. As I mentioned right at the top,

some folks have felt like maybe that narrative was dying, but others have had conviction that said this work was continuing unabated just with less promotion and more behind the scenes. and from where I'm sitting, that certainly seems to be true. Anyways, guys, I hope you are headed into a great weekend. I appreciate you listening. Until tomorrow, be safe and take care of each other. Peace.