The Breakdown - The Institutions Are Coming Back to Crypto

Episode Date: April 27, 2023

Deloitte has hundreds of jobs advertised around digital assets. Franklin Templeton just announced a major blockchain project with Polygon. Standard Chartered Bank is betting on $100k BTC in 2023. The institutions are back, baby.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced and hosted by Nathaniel Whittemore aka NLW. Research is by Scott Hill. Editing is by Rob Mitchell and Kyle Barbour-Hoffman. Our theme music is “Countdown” by Neon Beach.

With the shift of narrative thanks to the banking crisis and the other narrative opportunity created by Ethereum shift to proof of stake, you have a pretty powerful set of context for big firms to come back into the space. Now, it's always reasonable to ask how much we care about big institutions being in this space and whether those big institutions have incentives that are aligned with this space. But the fact is, they drive demand, they drive price, they drive infrastructure creation, and all of that's good for everyone in Bitcoin and beyond. 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. What's going on, guys? It is Thursday, April 27th, and today we are talking about the institutional narrative as relates the crypto industry. A few notes before we dive in. First of all, if you are enjoying the breakdown, I would so appreciate it if you would take the time to leave a hopefully five-star a rating or a review. I know I ask this a lot, but what it does is it means that Apple or Spotify or wherever you do that rating knows to recommend this show. And of course, I'm trying to grow it. I want more people in the community. And so your ratings and reviews really helps.

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great interviews coming up, and the AI breakdown is pumping out everyday reviews of that incredibly fast-moving industry. All right, so on to today's topic. Let's start with a little bit of the history of this idea of an institutional narrative in crypto or Bitcoin. You can see the earliest embers of it all the way back in 2013, 2014, when the Winklevosses started to think about and then apply for Bitcoin Spot ETFs. There has been a sense for coming up on a decade now that a big part of the future of Bitcoin and crypto in general was these big institutional players. getting involved. Crypto would reshape traditional finance from the inside out, right? Certainly after the ICO boom, it was definitely a big part of what was supposed to get us out of

crypto winter. I still remember how big people treated the news of backed launching. Do you guys even remember this firm, BAKKT? It was owned by the same company that owned the New York Stock Exchange, it had heavy hitters involved, and of course it did not get us out of the crypto winter of 2018 and 2019. However, in 2020, the thing actually really started to happen. This institutions or coming narrative wasn't wrong for basically the first time ever. There were a couple pieces of that. The first was that there was a new narrative that really hit with the hedge fundies, and that of course was Paul Tudor Jones' great monetary inflation thesis. He wrote that paper in May of 2020 as the COVID shutdowns were happening and huge amounts

fiscal stimulus was coming directly to citizens, and that paper, if you'll remember, was all about the ways that one might hedge against an inflationary monetary period. Of course, there was gold, but PTJ had been surprised to find with his team that they actually really liked Bitcoin in that situation as well. Thus, he announced an allocation. A couple months later, you started to have folks like Stanley Drucken Miller singing the same tune. It's one thing when one really smart hedge funder is interested in something. It's another when it becomes a trend. From there, we got the first notion of Bitcoin as a Treasury Reserve asset with Michael Sailor and Micro Strategy coming out and publicly buying a slew of Bitcoin and talking about

the great ice melting. And then, of course, that led up to Tesla doing something similar, which happened in February of 2021 and led to the peak of that bull run up into the 60Ks. Now, at that time, you could get headlines for getting involved with crypto and Bitcoin. I remember Nydig, for example, got huge headlines when mass mutual. invested $100 million in Bitcoin, even though it was a tiny fraction of their overall funding. But of course, this all cooled off a little bit in the second half of 2021. First of all, Tesla started to walk back its commitment to Bitcoin, saying that they would no longer accept Bitcoin for vehicles citing environmental concerns.

Then at the end of May, China banned Bitcoin mining, which would extend to basically Bitcoin and Crypto Everything in the coming months. And just in general, things started to cool off a bit. Now, of course, in the fall, we had that big run-up that actually led to the technical peak of Bitcoin's price, but almost no one really treated that as real in quite the same way. It was not the big part of the bull market. However, in that second half of 2021 and the beginning of 2022, there was another thing happening that kind of converged, even though it was a little bit different than this institutionalization. And that was NFTs in the Metaverse, giving more brands and corporations, some from the consumer

realm, a chance to also dip their toes into these waters. And what happened then is you started to actually see a segmentation of the way that different external and traditional actors were getting involved in and around the crypto ecosystem, with the corporate mainstream being a little bit different from institutional investors, even if overlapping. Importantly, some of the infrastructure needs for these companies were the same, and so even though they were distinct and separate, they were mutually reinforcing. But then, of course, 2022 hit. I think a really important thing to note was that 2022 was the first time that a crypto-bare market wasn't caused by crypto. Instead, it was caused by an external market cycle, which of course was the rate hiking cycle,

the fastest rate-hiking cycle in 40 years. That shift from a zero-interest rate-rate world to a very much not-zero-interest-rate world hit all risk assets. And of course, crypto being the farthest out on the risk spectrum, at least for these institutional investors, was proportionally harder hit. Now, on the one hand, the fact that this was driven by external market factors didn't make it any less painful. But it did mean that crypto wasn't all of a sudden persona non grotto with U.S. institutions. A lot of what we saw at the beginning of last year was firms like BlackRock, building out their capacity to do even more. I remember a conversation I had with Tyrone Ross, who speaks with a lot of these different firms, and really there was a sense in the first part of

last year that institutions were sticking around, maybe not trying to get headlines, by their time, building infrastructure, getting ready for the next bull run whenever that was to come. It was the same with NFTs. If you look across 2022, there were still tons of experiments, even if the companies involved knew they weren't going to get as much press as they might have a few months earlier with those experiments. But then, of course, the real shit started hitting the fan. We had the Luna Terra crash followed by the Three Arrow's Capital bankruptcy, into a Voyager bankruptcy, into a blockfie bankruptcy, and all of that hurt a little. We decoupled, to the downside from the rest of the risk sector, and maybe there was a dampening effect

on institutions' interest in being involved. The sector looked a little over-leveraged, if not a lot over-leveraged, and a little less professional than it had a few months earlier. But of course, if those things were like hitting a tree on your bike, FTX was like a train crashing into that tree and you and everyone you knew and throwing you into the next century. Even if there hadn't been a political response to FTX, the degree to which Sam had infiltrated so many different corporations and big firms meant that there probably would have been a withdrawal and a response from institutional investors as well. But there was new political pressure that surged after. We've talked extensively about banks and financial institutions and the pressure

that they've received to no longer service the industry. But we saw it even more explicitly with a specific type of firm in auditors. Senators Elizabeth Wurtones, Warren and Ron Wyden have written multiple letters to the public company accounting oversight board, castigating them for their failure to hold auditors accountable for what they call sham crypto audits. One of those letters came in January, one of those letters came in March, and they talked all about the role, quote, shady audits play in giving crypto firms of veneer of safety and financial stability. These letters went right at the jugular of proof of reserves, and Warren and Wyden called out specific firms, Mazars, Markham, Arminino, Prager, Metis.

Unsurprisingly, some of those firms stopped servicing crypto companies. The point being that at the beginning of this year, things looked a little bit bleaker for the crypto-institutional narrative. However, there have been a couple really important countervailing forces. The first is, somewhat interestingly, the banking crisis. When Silicon Valley Bank was going down and then signature crash, there were a lot of people who assumed, including myself, that a big part of the narrative that was going to try to be pushed was that this was somehow crypto's fault.

Instead, what happened is the price of Bitcoin just kept going up, and the narrative that the media latched onto was, in fact, Bitcoin performing in exactly the type of moment it was created for. All of a sudden, mainstream media remembered what it said in the Genesis block of the Bitcoin blockchain, and it was an interesting and convenient story that had people thinking a little bit different. And at that time, there was at least one financial giant that ran in the literal opposite direction of everyone else. Fidelity crypto had announced a wait list for their retail product in November, but then at the beginning

of March, quietly opened up to everyone in their client base. This means that people with Fidelity accounts can buy Ethereum and Bitcoin. They can do it with no fee, but Fidelity charges a 1% spread. There's no transfers in and out, but that's on the roadmap. And as Rick Edelman, a financial advisor put it, Fidelity being in this game provides, quote, both the credibility that crypto has needed and the opportunity for investors, most of whom rely on their financial. advisors for investment strategies. It's really hard to deny how important this narrative of Bitcoin

thriving while bank's struggle has been. For example, this week, Standard Charter Bank actually came out with a prediction that said that Bitcoin could be heading for $100,000 by the end of the year. This is the type of thing you're used to seeing from a Bitcoin Twitter influencer or something, not a huge international bank. And guess what their reasoning was? They said that the banking crisis was helping to, quote, reestablish Bitcoin's use as a decentralized scarce. digital asset. Against this backdrop, they went on, Bitcoin has benefited from its status as a branded safe haven, a perceived relative store of value, and a means of remittance. Standard Charter also pointed out that macro factors could be in Bitcoin's favor as well. This is, of course, because they believe,

as many do, that the Fed is nearing the end of its tightening cycle, and this could provide a tailwind for assets on the far end of the risk spectrum. The Standard Charter report reads, While BTC can trade well when risky assets suffer, correlations to the NASDAQ suggest that it should trade better if risky assets improve broadly. We also saw the first mention of the next cycles halving in this report, with it saying, as we approach the next halving, we expect cyclical drivers to become more constructive as they have in previous cycles. So, the point here is that Bitcoin has been doing its job as a narrative driver.

However, it's not just Bitcoin, Ethereum has helped as well. The merge was a very significant waypoint when it comes to Ethereum as an institutional asset. One of the things that many people pointed out around that time was that post-merge, Ethereum could fit in an ESG world. Just the other day, Jason Yanowitz from Blockworks wrote, This mainstream ETH narrative is more powerful than people realize. EF is now an ESG-friendly, deflationary yield-generating asset. Buckle up.

He points to a new scientist article that says, Cryptocurrency Ethereum has slashed its energy use by 99.99%. And obviously I'm not commenting right now on the ESG narrative in general and whether that's an important thing or a silly thing or a thing that's kind of doomed. The point is just that it matters to markets, and so Ethereum being able to lay claim to that narrative when it comes to the overall crypto sector's place in the institutional space is notable. Now, the fact that the merge went off without a hitch, technically speaking, was a big deal. And in many ways, the recent Chappellella upgrade rounded the circle by allowing withdrawals.

Now, leading into those upgrades, there were both barrenuous. cases and bull cases running around. The bear case that people were worried about could be that hundreds of millions, if not billions of cell pressure, would come to bear as ETH finally allowed unstaking. Would all that pressure crater Ethereum security? Now, there of course was a bit of cell pressure when things unlocked, particularly from sources like Cracken, who had to kill their program as part of an SEC settlement. But the flipside belief was that adding withdrawals would eventually be hugely bullish, and it would be hugely bullish because of institutions. The idea was that before withdrawals, institutions just couldn't stake EF because they need to know that their

assets would be available to them if and when they needed. That's not possible in a world where you don't know when withdrawals are going to be enabled. However, once withdrawals are enabled, all of a sudden, institutional investors that are interested in generating yield from their low-risk relative to crypto asset can just stake their ETH. While it's too early to know just how strong this force will be, there are some indications that this bullish narrative is coming true. Last week, Ethereum brought in a record inflow of 572,000 staked Ethereum. That's worth more than a billion dollars. A lot of that, it appears, is institutional.

Coindex wrote that the five top institutional-grade staking services have brought in a combined 235,330Eth, worth around $450 million since the Chappellella upgrades went live. So the point here is you're starting to see this opening to institutions coming back in the space, or maybe not just coming back in, but raising their hand and saying, hey, we've been here. There were a few more pieces of news that validate this this week. First of all, asset management giant Franklin Templeton, a $1.4 trillion asset manager, has expanded its on-chain offerings, announcing yesterday that they launched a tokenized version of its on-chain U.S. government money fund in partnership with the Polygon blockchain.

The fund is structured like a money market fund, meaning it is at least 99.5% invested in U.S. government securities, cash, and repurchase agreements, and designated. to trade at a stable price of $1 and offer a competitive yield. Roger based on the head of digital assets at Franklin Templeton said in a statement, extending the reach of the Franklin-on-chain U.S. government money fund to Polygon enables the fund to be further compatible with the rest of the digital ecosystem, specifically through an Ethereum-based blockchain. Then, of course, there's London Cryptoasset Manager, Old Street Digital.

They have quietly assembled quite the team, including a number of X BlackRock employees. Likewise, the former head of digital assets at Signature Bank has now joined, Fortress Trust, along with four members of his crypto specialist team. And maybe most of all or most interesting, especially given what we were discussing before about Elizabeth Warren and her open letters to auditing firms, a number of news outlets noticed this week that Big Four accounting firm Deloitte is apparently in the midst of a crypto hiring spree. The firm has listed 331 available crypto-related roles on LinkedIn, and all of them pretty much were posted in the last week. The job descriptions range from division management to tax management and include NFT specialties.

In a listing for their blockchain and digital assets manager, Deloitte says that applicants will be leading teams that provide audit readiness for blockchain and digital asset transactions. In addition, applicants could be required to design governance models, identify new risks, and evaluate blockchain reliability. 331 job openings is a major play in the space. My read is that institutions didn't fully leave but maybe had their foot out the door, when it came to the period around the FTX collapse. However, with the shift of narrative thanks to the banking crisis and the other narrative opportunity created by Ethereum shift to proof of stake,

you have a pretty powerful set of context for big firms to come back into the space. Now, it's always reasonable to ask how much we care about big institutions being in this space and whether those big institutions have incentives that are aligned with this space, but the fact is they drive demand, they drive price, they drive infrastructure creation, and all of that's good for everyone in Bitcoin and beyond. Until next time, guys, be safe and take care of each other. Peace.