The Breakdown - Crypto's Institutional Narrative: Less Dead Than It Seems?

Starting point is 00:00:00 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 nexus.com, and ftX, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, August 4th, and today we are talking narratives, and the institutional narrative specifically. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, leave a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Lastly, a disclosure as always. In addition to them being a sponsor

Starting point is 00:00:51 of the show, I also work with FTX. All right. So as I mentioned, today we are talking narratives, and this is something that I've long followed in crypto, trying to figure out what the patterns of what's driving interest or even more specifically what people are trying to have drive interest in this space. I think one of the ways to read crypto history or really the history of any particular niche or market is to look back at the patterns of what people discuss, what people find important, what people think are going to be the drivers of interest and excitement in this space in the weeks and months to come. And with that in mind, one could be forgiven for thinking that the institutional narrative surrounding crypto is at a fairly low point. There is plenty of evidence to

Starting point is 00:01:41 suggest that with the great repricing happening across all risk assets, plus the wave of crypto institutional failure that those price changes set off in this industry, that Tradfai buyers are kind of cooling and that it's unlikely that they're going to be a big part of a new bull run. Let's look at some of that evidence. A big one, of course, is Tesla's sale of approximately $936 million worth of Bitcoin last quarter. That represented about 75% of the store of Bitcoin they had purchased in 2021. They also took about a $100 million loss on that sale. Another example of cooling Tradfai institutional engagement with crypto might be the CBOE's write-down of Eris X. Exchange operator CBOE Global Markets in its quarter two earnings report announced that it took a

Starting point is 00:02:33 $460 million write-down on its purchase of digital asset exchange ErisX. CBOE had announced the acquisition of ErisX on October 20th when Bitcoin was quite near its very top price of $67,000. Their goal, of course, was to get a piece of the crypto trading action, but obviously the market has since come crashing with significant financial consequences for them. And what about Kathy Wood selling coin? In the last week in July, three of Arks' sold a little over 1.41 million shares of coin worth about $75 million at the time. The sale came after Bloomberg reported that Coinbase was the subject of an SEC probe into whether it improperly allowed American customers to trade unregistered securities.

Starting point is 00:03:20 Finally, what does it mean that Michael Saylor is stepping down? Even though there's no evidence that this signals a shift in their Bitcoin strategy, that hasn't stopped Fudd that Micro Strategy is now going to sell some of their Bitcoin holdings. But let's now look at each of these stories from a slightly different angle. For Tesla, we kind of need to look at why they sold. According to their earnings call, they said, we were uncertain when the COVID lockdowns in China would alleviate, so we sold Bitcoin to bolster our cash position.

Starting point is 00:03:53 In other words, it was a decision that was about Tesla and specific challenges to their core business, not about belief in Bitcoin or not. Indeed, Elon made clear that it was not an indictment of Bitcoin should not be read as an indictment of Bitcoin and that they'd be open to buying more in the future. Part of what makes Bitcoin more attractive than something like gold as a balance sheet asset is this exact thing,

Starting point is 00:04:17 the ability to sell it when you need it. Every business has to make unique decisions that are relevant for it about how it manages its treasury. And that doesn't just include buying and holding things forever. It includes using assets as assets. In other words, Bitcoin performed the function that Tesla needed it to. Then there's the CBOE. First of all, ERISX was in a tough position to compete. They had worked hard to get licensed by the CFTC, but hadn't really made a big splash in the day-to-day of U.S. trading. What's more, even with those licenses, what you can offer in the U.S. is still extremely limited.

Starting point is 00:04:53 So that particular exchange didn't really go into a bare turn from a position of strength. Secondly, again diving into the communication beyond the headlines, it is clear from the CBOE that this is about accounting and not a reflection of a change strategy. CBOE chief financial officer Brian Shell said, We believe that our adjustment reflects the reality of the digital asset market environment today, but in no way changes our commitment to the digital asset space. And then there's Kathy. Before the sale, Arc was the third biggest shareholder in Coinbase, holding 8.95 million shares.

Starting point is 00:05:29 Put differently, even after this big sale, the first sale they've ever made of coin, they still have about 7.5 million shares of coin and remain one of the biggest shareholders on Coinbase's books. That doesn't sound to me like a believer who has lost the faith. It sounds like an asset manager adjusting risk based on new information that could impair the business in the future. And finally, with micro-strategy. As I mentioned on yesterday's show, despite moving out of the CEO role, Michael Saylor controls around 68% of voting decisions based on the specific type of shares he holds. This means that unless he himself loses conviction around Bitcoin, I don't see their strategy changing. However, it's not just these slightly different interpretations of negative institutional news that prompted this show.

Starting point is 00:06:15 There are two really big, noticeable bits of institutional discourse from today. The first is that BlackRock, the world's biggest asset manager, is partnering with Coinbase to offer Bitcoin to institutional investors. The way that it will work is that BlackRock customers who also use Coinbase will be able to manage everything through BlackRock's proprietary Aladdin platform. Those customers will have access to crypto trading, custody, prime brokerage, and reporting. Joseph Chalom, the global head of strategic ecosystem partnerships at BlackRock, said, our institutional clients are increasingly interested in gaining exposure to digital asset markets and are focused on how to efficiently manage the operational lifecycle of these assets. This connectivity with Aladdin will allow clients to manage their Bitcoin exposures directly

Starting point is 00:07:01 in their existing portfolio management and trading workflows for a whole portfolio view of risk across asset classes. Now, when I say that BlackRock is the world's biggest asset manager, we're talking like $8.5 to $10 trillion in assets under management. This proprietary platform Aladdin has more than 200 institutional users, which include insurers, pensions, corporations, banks, and more. For those asset managers, it does really make a big difference to be able to manage crypto in exactly the same way alongside and using the same infrastructure as their other assets.

Starting point is 00:07:38 The markets certainly seem to like the news. BlackRock was up, but Coinbase was really up. Coinbase opened 35% on the news and is around 13% up on the day right now. BlackRock had been nudging slowly into this crypto space. A few months ago, CEO Larry Fink said that they were going to be exploring ways to offer digital assets to their customers. And now, of course, ultimately the question is whether the users of the Aladdin platform will actually want to buy crypto, but it only makes sense that BlackRock would be listening to demand from their customers in exactly the way that they described. In times like these, security of your assets should be your number one priority.

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Starting point is 00:09:35 One of the largest exchanges in the U.S. FTXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. The news was certainly enough to get some fist-pumping tweets. David Marcus, formerly of Facebook's Libra Project, writes, This is a big deal. This partnership will enable access to Bitcoin for some of the largest institutional investors in the world.

Starting point is 00:10:07 Former Trump official, now hedge fund manager, Anthony Scaramucci, says, BlackRock has done three seismically important things this morning. One, provided an A-plus housekeeping stamp of approval on the role of Bitcoin in diversified portfolios for all investors. Two, responded to what must be substantial demand for Bitcoin services by partnering with Coinbase to enable institutional clients to use its Aladdin investment management system, which is the investment management system used by the vast majority of institutional investors. And three, focused its efforts entirely on Bitcoin, which illustrates the unique important role that Bitcoin plays in the digital asset ecosystem and underscores

Starting point is 00:10:45 how incredibly insanely stupid it is for Ripple and fanboys to attack Bitcoin. With that last line, Scaramucci is referring to a campaign funded by one of the Ripple co-founders to push Bitcoin to be more environmentally friendly by converting to proof of stake, which is viewed in the industry as a highly politically motivated move, designed to shine Ripple in a better light. But that is, of course, the topic of a different show. Now, if that was the only institutional news, it still would have been big, but it wasn't. According to a financial times piece this morning, the Fairfax County Retirement System has just received approval from their Board of Trustees to begin yield farming. The Fairfax County Retirement Systems is a $6.8 billion

Starting point is 00:11:26 pension fund system from Fairfax County, Virginia. In an interview with F.T., Catherine Mulnar, the chief investment officer, of the Fairfax County Police Officers' Retirement Systems, which manages about $1.8 billion, said, quote, some of the yields that you're able to achieve in a yield farming strategy are really attractive because some of the people have stepped back from that space. Indeed, in this article, FT kind of marveled at the fact that the credit crisis in crypto post-terra hadn't deterred Fairfax. Instead, Molnar said that, quote, for those that are still willing to provide liquidity, decent profit seekers, they're actually able to earn more attractive yields at the moment. Now, to be clear, these guys aren't putting in huge amounts yet or

Starting point is 00:12:05 experimenting with novel DFI-Brigges or anything like that, they made two $35 million bets, one with para-taxas capitals digital yield fund, and one with Van Ex-New Finance Income Fund. It's also worth noting that these guys are familiar with the space and were actually one of the earliest in. Both the $5 billion county employment retirement system and the $1.8 billion police officers retirement system had invested in Morgan Creek's blockchain opportunities Fund in 2019. Those investment sizes were 10 and 11 million respectively. A quote from Andrew Speller, the investment chief at the County Employees Fund, kind of shows how the progression for a fund manager might work in this space. We started in venture capital and private equity, but once we got

Starting point is 00:12:50 more comfortable in the space, we started to think a bit broader about how we might be able to use strategies and digital assets in other parts of the portfolio. Fairfax also shows the benefits of getting in early. Although their initial investments were taking a hit of around 50% this year, that still leaves the investment up 350% overall. Echoing other institutional officers that we've heard on this show, Molnar said, we're still convicted in our original thesis. Things will bounce back and the stronger technologies will probably survive. Now, on top of all of this, Bitcoin and crypto funds have now seen five consecutive weeks of inflows, according to coin shares. Lysaw inflows totaling 474 million, which almost totally matched the outflows in June of 481 million.

Starting point is 00:13:37 Pomp wrote about all of this today. On the Black Rock front, he wrote, This partnership is a big deal, not because of what is happening, but because of what it signifies. The world's largest asset manager is announcing a partnership with the largest publicly traded crypto exchange. After, Bitcoin has fallen approximately 70% from the all-time high of 69,000. Those who are Bitcoin native understand that the real value is countered. captured during bare markets. It now appears that large institutions like BlackRock understand that as well. If the institutions aren't leaving during bare markets, then the market outlook for Bitcoin over the medium to long term is quite compelling. He goes on. This translates to the classic

Starting point is 00:14:15 theory of being greedy when others are fearful. With that said, there is immense risk still associated with the Bitcoin and crypto industry. There are a few assets that can rise and fall with the level of volatility that is commonplace in crypto. There have been previous problems with the lack of disclosures lack of regulation. And of course, there are plenty of unknown risks that are difficult to identify, but that isn't stopping the institutions from participating. Sophisticated investors understand that short-term price movements are likely noise. They're continuing to invest capital, build products, and strike moat-building partnerships. These large institutions have the balance sheet to weather the bare market in crypto or the recession in the macro economy. They aren't worried

Starting point is 00:14:54 about what happens today, tomorrow, or next week. This is the 10-plus-year strategy being laid right before our eyes. It is rare to live through the birth and subsequent scaling of a new multi-trillion dollar asset class, but that appears to be what we are doing now. Now, this all comes back to something I've discussed before. For a very long time, institutions coming to Bitcoin and crypto was a narrative. It goes back even farther, but just to pick one full cycle, when backed launch during crypto winter in 2018, it was supposed to be the savior. I mean, this company came from the same company behind the New York Stock Exchange. Right? Of course, it amounted to nothing. Various other institutional moves in 2018 and 2019

Starting point is 00:15:35 also had similarly little impact on the crypto markets as a whole. But what was happening quietly behind the scenes is that the people who were in that space, like the Morgan Creek Capitals of the world, who convinced this pension fund to make their first bets in 2019, were doing a ton of educating and priming. Although crypto is loud and all over the mainstream during bull periods, there's a lot to be said for the learning and reflection that happens during bear markets. I made basically the same point yesterday about brands experimenting with NFTs right now. A Reuters author tweeted why brands were still doing things with NFTs given how to press the prices were. The reality, though, is that when everyone is just chasing market

Starting point is 00:16:12 movements, it doesn't give a good picture of how interesting something really is. Brands are theoretically excited about NFTs as a way to engage with their customers in new and interesting ways. They're going to have a much better idea if that thesis is valid, if they test it in an environment where there's not some huge external motivation for people to be in NFTs. And so I think there's value in the calm of institutions exploring and getting involved in the type of market we're in now versus six months ago. In any case, after all that priming, we know what happens next. Paul Tudor Jones has his great monetary inflation thesis in May 2020

Starting point is 00:16:46 that gives Bitcoin serious narrative juice. That's followed by other big hedge fundies talking up Bitcoin, then we have Sailor and Micro Strategy in the Bitcoin Treasury thesis, which works its way all the way to Tesla at the beginning of 2021. Indeed, that period from about May 2020 to May 2021 was the peak in the institutional narrative being in the driver's seat. What happened since then has been more volatile. Yes, Bitcoin hit all-time highs in the fall, but the forward momentum of this bull was

Starting point is 00:17:12 never as driving or as clear after Tesla backed off for ESG reasons and China banned Bitcoin mining. And of course, from a price perspective since November of last year, it's been sideways and down. And yet, there is still all of the things. this institutional activity bubbling below the surface. Pomp, probably rightly, calls it institutions being smart and buying while prices are low. But to me, it just looks like a lot of organizations who have been learning about crypto discussing it, fielding internal presentations, empowering internal advocates to make the pitch, slowly but surely getting involved. Not because it's the flashiest most hyped thing right now, but because it's a novel asset

Starting point is 00:17:49 class that's here to stay and likely has a lot more upside and interesting opportunities to come. It's another sometimes exciting, sometimes boring asset. This is post-narrative institutionalization. It's where we are, and I think it's quite healthy. For now, I want to say thanks again to my sponsors, nexus.com. Chainalysis and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Crypto's Institutional Narrative: Less Dead Than It Seems?

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