Bitcoin evolution asks for Big Investors

After booming in 2017 and going bust in 2018, the cryptocurrency market has been making inroads with institutional investors, setting up 2019 to be the year a Bitcoin investment may join stocks, bonds, currencies and commodities as a mainstream asset.

The maturation of the cryptocurrency market could accelerate if a Bitcoin ETF passes regulatory muster. And the launch later this year of physical settlements of crypto futures contracts could further open the floodgates for Bitcoin investment seekers.

The institutionalization of the cryptocurrency market is a big deal for ordinary investors. Big money managers could soon package crypto assets into mutual funds and ETFs, while paving the way for Bitcoin to enter 401(k)s and IRAs as regulated, mainstream investments.

That means anyone with a brokerage or retirement account could make a Bitcoin investment eventually. Institutions also will pass on the benefit of seamlessly and safely buying, selling, storing and spending digital assets to their customers.

“We’re bullish on 2019 because finally the institutional rails are coming in place,” said Matt Hougan, global head of research at Bitwise Asset Management, a Bitcoin investment provider.

Meanwhile, stock market operators Nasdaq (NDAQ) and NYSE-parent Intercontinental Exchange (ICE) announced plans for Bitcoin futures trading, joining CME Group (CME) and CBOE Global Markets (CBOE) in the fledgling space.

After a frenzied stampede to dizzying heights in 2017, the subsequent collapse was one of the worst in Bitcoin’s history.

It was marked by fraud allegations at top investment platforms as well as reports of fake volumes and price manipulation. In fact, crypto assets lost $731 million to hacks, scams and heists in the first half of 2018.

The cryptocurrency market has shrunk to $120.4 billion, after peaking near $795.8 billion just over a year ago, according to CoinMarketCap. Bitcoin kicked off 2019 with a rally but is now back below $4,000.

The crash smoked out crypto speculators and other investors who got caught up in the hype. But some affluent investors sensed an opportunity in beaten-down prices.

In crypto land, the reaction to large financial institutions is split into three broad camps, said Michael Casey, senior advisor for blockchain research at MIT’s Digital Currency Initiative.

Speculative investors expect the influx of big money to drive Bitcoin prices straight up. A second crowd sees big institutions as anachronisms dabbling in something they don’t understand.

The third camp, where Casey’s own views fall, sees institutions as a necessary or inevitable phase toward a more decentralized financial system.

“You need custody services for the average Joe,” Casey said. “If the future of digital assets is to be more mainstream, then we need ordinary folks to participate. And they won’t do it without trusted institutions along the way.”

He also thinks institutions will help with things like price discovery, ultimately benefiting everyone.

But in the near term, Casey foresees a clash of cultures between Wall Street and the renegade ethos of Bitcoin. In fact, Bitcoin gained prominence during the financial crisis and reflected the desire for a currency that’s free from a central bank or state.

Moreover, Casey argues institutions can’t apply their usual methods of evaluating assets to coin and token projects. Rather than focus on market cap or price, they should look at how many developers a project has, or how deep the community’s engagement is, or how many exchanges the project will be on.

Even the idea of cryptocurrencies as an emerging asset class is questionable, he finds.

“A crypto token is a bet on an idea, on an asset whose value is a direct outcome of the whims of the community behind it,” said Casey, who’s also advisory board chair at Coindesk. “Institutions need to be aware of that.”

In turn, crypto investors shouldn’t naively believe that institutional money will push prices back up, at least in the short term. “Institutions are looking to capitalize on the volatility,” he warned.

For now, some big institutions synonymous with Wall Street — and the financial crash — are keeping an arm’s length distance.

Uncertainties on whether regulators will treat digital tokens as commodities or securities chilled plans by big banks like Goldman Sachs (GS), Morgan Stanley (MS) and Citigroup (C) to develop crypto trading desks and other projects, Bloomberg reported in December.

Fidelity’s Jessop has a key piece of advice for investors: The long-term value of the underlying technology deserves as much attention as cryptocurrency and Bitcoin prices.

Jessop called digital assets one of the most transformational technologies since the internet.

“In the late ’90s, the whole web space had a significant decline,” he said. “But the technology is quite durable and, 20 years later, we can’t imagine a world without the internet.”