The Day Crypto Came of Age

The Rising Institutional Interest in Cryptocurrencies, and What It Means

Don’t worry if you remain unconvinced by the long-term worth of cryptocurrencies. Warren Buffett is not convinced either. In February of this year, the Oracle of Oklahoma restated a long-held view: that, subversive and fashionable and fashionably subversive though cryptocurrencies may be, they simply “[have] no value”. In Buffett’s estimation, as crypto yields no tangible product and is thus of entirely contingent value, it is fit to be filed alongside the tulips as a kind of financial “mirage”. He was quite explicit in adding that he did not own any cryptocurrency and never would. Lunch with Justin Sun, founder of cryptocurrency TRON and BitTorrent CEO, did not change his mind on the matter (Justin picked up the $4.57 million charity tab for the privilege).

Mr. Buffett’s apprehensions about the value of crypto are hardly unprecedented. In fact, they’re reservations common to an awful lot of financial professionals. Since its birth in 2009, and its achievement of critical mass in the public imagination at some point between 2012 and 2015, crypto has had a hard time of being accepted at the club. This in and of itself is not unusual, nor totally unreasonable —even putting the technology’s relative youth aside, its lack of centralisation, lack of regulation and oversight, unwieldy UX, and means to enable the unsavoury, are a lot to handle.

Nevertheless, these are seasons of change. There is, in fact, much of late to suggest that something interesting has begun to happen to the trajectory of cryptocurrency. We are beginning to see mounting interest in digital assets from major financial institutions. In some cases, even those who once offered hostile rebukes to bitcoin, and crypto as a whole, are changing their tune. Presuming that what we are seeing is a new precedent establishing itself, then we can expect that crypto will not leave the 20s as it entered it. There is reason to believe that the next ten years could see bitcoin and co. become a truly global, mainstream ecosystem.

Crypto-Legitimate

In the past several months, we have seen a number of power moves in the space where cryptocurrency and scale banking interests meet. In January, Julius Baer, the 3rd biggest of the Swiss banks, launched a crypto offering in collaboration with SEBA. They are the first crypto bank of their size to be approved by Swiss financial regulators, and their new digital asset management initiative looks set to be a pillar of their operations going forward.

Similar scenes played out in Korea, as Kookmin, the national bank, launched its own cryptocurrency management service. It looks to be progressing eagerly in this direction, too, with a raft of new partnerships announced in the late summer.

Elsewhere, there have been notable redressals of course from prior critics of crypto, even those whom were previously harsh in their low estimations of the technology. For instance, in 2017 Mastercard CEO Ajay Banga dubbed any cryptocurrency not backed by a government ‘junk’. Fast-forward to 2020, and his company has done an almost complete 180, and is investing heavily in the crypto space.

Perhaps the move most indicative of a sea change in establishment attitudes to crypto is a recent appointment at Goldman Sachs. In August, Matthew McDermott was named the leading bank’s head of global digital asset trading. It is not merely that, in doing so, Goldman Sachs has shown redoubled commitment to this region of banking, which would be something in and of itself. Nor is it merely that McDermott is a veteran professional in finance, and that he replaced a young MIT graduate and crypto prodigy, signalling (however justly to McDermott’s out-going precedessor) that Goldman Sachs sees crypto as more than a mere plaything for the young and very talented.

No; it is what McDermott said upon his being unveiled in his new position that is most remarkable.

McDermott doesn’t just see crypto as being a separate, viable component of the trading ecosystem, to inevitably be welcomed by institutions of that kind worldwide. It is that McDermott expressed a vision that within the foreseeable future, all equities and liabilities would be native to blockchain. This is an unprecedented show of faith, given big finance’s aforementioned agnosticism in the face of this interlopious young technology. As per CNBC’s discussion with McDermott, Goldman Sachs’ new main man sees the potential for this shift to occur in “the next 5 to 10 years”.

Hurrying the Future

It won’t be quite so easy as perhaps it sounds. Trading crypto in the manner in which one trades regular equities is a considerable technological challenge at present. There is not, as yet, a Stock Exchange of crypto — that would rather defeat the point of cryptocurrencies as essentially decentralised in nature.

For those who might not be aware of the exact mechanics of crypto in relation to regular equities trading — with cryptocurrencies, one has a choice of multiple exchanges to trade across. Of course, there is considerable money to be made through arbitrage — but, owing to the infamous volatility of cryptocurrencies, and the technical impracticability of manually monitoring a large number of exchanges concurrently, efficient arbitrage is all but impossible. Even the most athletic of traders trying to work arbitrage across multiple exchanges will end up with significantly less beneficial spread and more slippage [1] than is ideal. They will also remain prone to the downtime that most exchanges suffer. More annoyingly still, these exchanges are most prone to crashes at the time of highest market volatility (i.e. exactly when those traders most want to trade).

This state of affairs will not do, should there be broad attempts to scale crypto trading up to mainstream-size. The principle technological challenge of the next ten years in crypto is the design of systems which are able to cut exchange times, reduce downtime to an absolute minimum, and provide a greater visibility across all crypto exchanges, to make the strategies traders love (arbitrage, momentum selling etc.) more feasible. There is significant space for large institutions to make cryptocurrency trading more palatable, without doing meaningful disservice to its decentralised roots, by either adopting a technological solution capable of enabling this enhanced visibility, or making one of their own. Throw in some fine long-game features, like reliable trailing stop-loss and buy-stop features, and crypto may be made palatable enough for a general interest, ‘long-game’ audience as well. When even caretakers in Chelsea primary schools are swotting up on the caprices of digital asset trading, one has to wonder at the height of potential market-size we’re actually looking at.

Institutional players have a clear advantage in this effort. Their liquidity is deeper, by fathoms, than any single crypto exchange can boast. Their technological resources have the potential to be considerably greater than the independent competition. So too do institutional players have the one thing hardest for new players in crypto to establish: trust. After all, a bank like Goldman Sachs’ value proposition is a matter of long-standing public record among traders. Input from existing financial institutions could therefore provide an at least customary version of the one thing which has, heretofore, dogged crypto through its absence — accountability.

What’s more, we have a deep coming recession to confront over the next decade. It’s bound to be a rough road, but it will breed creation — in fact, in the second quarter of 2020, we saw market forecasts in cryptocurrency recover to a state of mild bullishness, after a long and arid 2019. Why? Because financial institutions are willing to try new things which might stimulate the kind of growth required to make up the ground lost in the early troughs of the COVID-19 pandemic.

We are sometimes introduced into adulthood as a direct result of trying circumstances. Present conditions might just see crypto truly start to come of age.

[1] In online trading, slippage refers to the difference between the expected price of a trade, and the price at which an exchange actually executes that trade. In times of high market volatility and market-order-demand, there tends to be higher slippage as exchanges struggle to deal with the volume of trades being executed. In crypto, this is a particular disadvantage. Volatility is extraordinarily high, meaning values shift more quickly than in regular equity trading, and trade execution speeds are lower, owing to the amount of energy expended per exchange. As a result, traders are all the more prone to experience slippage when trading cryptocurrency, particularly in high-demand periods.