Guest post from Mark O. Witten – CIO, Portal Asset Management

As Crypto Asset Fund Managers, we constantly ask the question: “Why do we not see more institutional investment in the crypto assets space?”

Answering this question from both a macroeconomic assessment of global market forces, and trying to better understand the institutional investor mindset, we realised that in fact this question is incorrectly phrased. It should read “How much additional growth are we currently seeing in institutional adoption and investment, and when is the tipping point?” Institutions are quietly laying the foundations for full participation in crypto markets in 2023.

The Great Debasement Continues

We have often discussed how global quantitative easing will lead to a debasement of currency and a sharp increase in inflation (remember “M x V=P x Q”, always!).

The USA Money Supply M3 has grown 1,200% from 1.7 trillion in 1977 to $22 trillion 45 years later. The concerning aspect is that 47% of this increase has come in the past three years, most notably accelerating since the pandemic began in March 2020.

The challenge is we are now in a global debt trap. We cannot hike rates aggressively without causing a recession and eventually depression. The first country to blink in this global game of who will default first is the UK, with the BOE stepping in to pledge unlimited bond purchases to avert an “Imminent Gilts Crash”.

This resulted in the 30-year yield falling the most on record in the wake of the intervention in order to stave off forced selling of UK Gilts by liability-driven investment funds, such as pension funds.

Markets have now turned their attention to Credit Suisse and Deutsche Bank as they both scramble to shore up their balance sheets and convince investors they are not about to spark a “Lehman’s-type” gestalt risk to the global financial system. Their Credit Default Swap (CDS) spreads or insurance on their debt says otherwise with the spread reaching 2009’s highs at 250bps.

You cannot raise rates and reduce liquidity during stagflation, defined as “an inflationary period accompanied by rising unemployment and lack of growth in consumer demand and business activity.”

This combined with tightening central bank liquidity resulted in the prolonged 1929-1932 crash that saw -89% correction from peak to trough over 3 years.

Unfortunately you have no option but to inflate your way out of the debt, which results in further transfer of wealth from the middle class to the large corporates and banks. Main Street is being hollowed out by Wall Street and Silicon Valley, but unfortunately, the alternative is financial collapse of the global fiat-based capitalist system. The Great Debasement will continue shortly as the Fed reverses course, and fiat cash’s value will continue to be eroded.

The Rapid Adoption of Crypto Continues Unabated

In assessing investment opportunities, it’s difficult to decipher where the trends are going unless you know where they originated from and why, and more importantly – how they evolved.

The underlying drivers of the genesis of Crypto Assets in 2008 have been strengthened – especially the need for decentralisation and an independent, alternative accounting / transacting system. BTC was created in response to the reckless excess leverage utilised and predatory lending practices of banks that sparked the 2008 “Global Financial Crisis” or GFC.

As risk was moved from bank balance sheets to sovereign balance sheets with the 2008 Bank Bailouts and 2009 TARP (Targeted Asset Relief Program) we then saw the rolling European Debt Crisis unfold in 2009 sparked by the collapse of Iceland’s Banking system. This crisis peaked in 2016 with Brexit as many European countries were unable to repay their loans and unable to roll / refinance their debt.

This calamity culminated with a new precedent being set when “Bank Bail-In’s” were used against Cypriot insured depositors in various banks, most notably Laiki, who had their deposits seized and transferred to the “creditors” such as German banks, all guaranteed by the IMF. Indeed €6bn of the €10bn IMF guarantee was paid for by Cypriot depositors. Investors in 2016 realised that both global governments and banks could no longer be trusted to manage risk and match assets and liabilities appropriately.

Over the past 15 years investors have been forced to examine alternatives that provide transportability, security, and immutability in ownership. The risk, particularly from debasement through inflation, in having your assets in any centralised ledger such as bank or in any central bank-controlled fiat currency should be obvious for any investor who wishes to preserve and control their wealth.

The main reason to own crypto assets is firmly still as an investment opportunity and for diversification benefits. It has also become a much cheaper and faster way to send money to others, particularly across geographical borders. Ultimately, people see the promise in crypto assets for a more equitable economy.

Convergence and Institutional Adoption

We believe we are at the tipping point of a very rapid surge in adoption of Crypto Assets, and this is underpinned by the factual growth in both institutions and governments as detailed further below, combined with the private sector, seeking independent alternatives.

Most Institutional investors raise concerns around risk and volatility of the crypto asset market. However, it can further be seen empirically that a simple ‘buy-and-hold’ strategy with an allocation as small as 1% of an investor’s portfolio has resulted in a 14% outperformance over the past 7 years.

Crypto Assets are well worth an allocation, especially given its significant upside potential in the form of a perpetual call option. We are very much at the tipping point for rapid adoption, which I think will begin in 2023. In a world of continued debasement and risk of tenure, combined with soon to be unlimited QE and rapid advances in technological innovation by developers, we believe that crypto assets are very attractive substitutes to both fiat currency and fixed income with their deflationary characteristics, security of ownership and independence.

What is an important distinction in this bear market vs the bear market in 2018 is that in this instance we have seen a continued growth in the BTC wallets, and none have left the ecosystem as per the chart below. In this crypto winter, we have seen increased developer activity, growth in user base and more importantly, institutional entrance.

Large Increase in Institutional Crypto Asset Investment

Q3 of 2022 saw a monumental level of institutional investment into crypto assets with Shima Capital launching a $200m blockchain fund, Invesco launching a metaverse specific fund, auction house Christies supplying seed funding to firms working on “web3 innovations”, Barclays buying a stake in self-proclaimed “institutional gate to digital asset investing” firm Copper, Felix Capital raising $600m for its fourth fund and the South Korean government investing $177 million into metaverse projects, directly.

In addition, CoinFund launched $300m Web3 fund, crypto fund Variant is looking to invest $450m into Web3 and DeFi, Lightspeed raised $7 billion across its 3 US domiciled funds and Indian Fund, Multicoin’s third and largest fund raised $430 million and finally Binance Labs closed a Web3 $500m fund.

Whilst the market price (perception) remains negative along with the macro, the underlying news flow in crypto assets is continuously positive:

  • Fidelity Weighs Bitcoin Trading on Brokerage Platform – The firm has more than 34 million brokerage accounts.
  • Schwab, Citadel Securities, Fidelity, Other Wall Street Firms Start Crypto Exchange EDX
  • Norwegian central bank uses Ethereum to build national digital currency
  • KKR dives into Avalanche blockchain to tokenize and ‘democratize’ financial services
  • Two Sigma Ventures Raises $400M for Two Funds, Plans Crypto Investments – The firm invests about 15% of its capital to crypto and Web3 projects
  • Nasdaq is preparing to launch an institutional crypto custody service
  • Ethereum activates The Merge as it successfully shifts to proof of stake
  • SEC to open digital asset office as it cranks up regulatory scrutiny of cryptocurrencies
  • Investment Management Giant Franklin Templeton to Offer Digital Asset Strategies to Wealth Managers
  • India’s Central Bank RBI Starts Digital Currency Pilot With 4 Banks
  • Coinbase shares soar on deal to provide crypto services for BlackRock clients
  • European Central Bank recruits Amazon, 4 other firms to test digital euro
  • Brevan Howard Scores Largest Crypto Hedge Fund Launch Ever with US$1 BN for Flagship Crypto Hedge Fund

We believe that crypto assets provide the best long-term opportunity of all asset classes and will outperform significantly as and when the chaotic global macro-economic conditions moderate.

In the short term, institutions are underestimating long-term fiat currency debasement risk and technological adoption trends while overstating crypto asset risks, which can easily be managed with correct sizing of the investment – between 3-5% as an allocation. Furthermore, we can see that on-chain metrics explain network adoption (demand) and are evidence that both the number of wallets and market participants are increasing, despite this bear market in all risk assets.

Recent feedback form one of the funds we invest in who attended the Token 2049 Conference in Singapore, which is the premier conference in Asia: “It is clear that there is still a lot of ‘money on the sidelines’ which we expect to be deployed in the coming year and retail interest in crypto assets is still very strong”.
About Portal Asset Management Portal Asset Management (“Portal”) core thesis is predicated on our firm belief that ‘everything is about to change’ as digital assets become the fourth superclass of assets. The investment teams of Portal Fund, Horizon Fund and Radiance Fund bring an institutional-grade investment approach combining both quantitative and qualitative investment analysis with prudent portfolio construction to provide access to this unchartered space. As the digital currency market formalises and becomes regulated, it continues to represent a new frontier for accredited investors to seek superior risk-adjusted returns. These markets are inefficient and represent substantial sources of alpha for skilled investment managers. For more information, please visit and follow @portalassetmanagement

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