The Institutional Midnight Ride

In April 1775, Paul Revere embarked on a midnight ride to warn the American colonists of the impending British attack. But what if Revere was wrong? What if the British were not coming after all, or at least not in the numbers and strength that he expected? This question is analogous to the recent narrative attributions, which boldly claim that the wondrous institutions have finally reached the pearly gates of Bitcoin. In this article, we explore the implications of this notion for the asset class and its future.

One of the main questions that digital asset enthusiasts and skeptics alike have been asking is whether digital assets are becoming more accepted and adopted by mainstream investors and institutions or whether they are still a niche and speculative phenomenon that will fade away soon. This question has become more relevant in recent months, as several major developments have occurred in the crypto markets that involve traditional finance players. These developments include:

• The filing of applications for various types of exchange-traded funds (ETFs) that track or invest in digital assets by some of the world's most reputable and influential investment firms, such as BlackRock, VanEck, Invesco, WisdomTree, and likely soon Fidelity.
• The launch of EDX Markets, a new crypto exchange that is backed by some of the most prominent financial institutions, such as Charles Schwab, Citadel Securities, Fidelity Digital Assets, Sequoia Capital, and Paradigm.
• The approval of the 2x Bitcoin Strategy Futures ETF (ticker BITX) by Volatility Shares Trust, which offers double the performance of the S&P CME Bitcoin Futures Daily Roll Index each day.
• Deutsche Bank looking to grow its digital assets and custody business as part of a broader strategy to boost fee revenue for its corporate bank unit. Deutsche Bank has now applied to BaFin for a license for crypto custody.
• The continued growth and innovation in the digital asset space, with the emergence and adoption of new concepts and applications, such as Bitcoin ordinals (NFTs), Ethereum layer-2 solutions, NFT financialization, and liquid staking backed stablecoins.

These developments have sparked a debate among crypto enthusiasts and skeptics: are we witnessing a paradigm shift in the adoption and acceptance of crypto assets by mainstream investors and institutions, or is this just another hype cycle that will fade away soon?

But This Time is Different!

It is often said that the four most dangerous words in finance are "this time is different." Proponents of such thinking would point to the recent spate of announcements that suggest a growing and lasting interest in crypto assets from traditional finance participants. Firstly, they argue that the quality and diversity of the ETF applicants show that some of the most reputable and influential names in the investment industry are exploring various ways to gain exposure to the crypto space through regulated and liquid vehicles that suit different investor needs and goals. For example, BlackRock —  who has a 575-1 approval/rejection ratio —  has filed for a spot bitcoin ETF that would hold actual bitcoins in custody using Coinbase. An amended point of note on the latest filing will see the addition of Nasdaq as a partner to ensure pricing data oversight to mitigate prior concerns raised about a physical BTC ETF. This would allow investors to directly own bitcoins through a regulated and liquid vehicle that tracks the spot price of bitcoin.

Secondly, they argue that the launch of EDX Markets shows that some of the most respected and influential players in the traditional finance world are not only interested in crypto assets but also willing to invest in and support the development of a new and innovative platform that could improve the efficiency and accessibility of the crypto markets. EDX Markets operates as a non-custodial exchange that reduces the risk of hacks, thefts, or misuse of funds. It also offers a retail-only quote feature, creating a more fair and transparent market for retail-originated orders.

Thirdly, they argue that the approval of the levered BTC futures ETF signals that the regulator is willing to accept some level of risk and innovation in the crypto space. The ETF allows investors to gain leveraged exposure to bitcoin price movements without holding or trading actual bitcoins. It also attracts significant inflows from investors who want to gain exposure to Bitcoin through a regulated and familiar vehicle.

Finally, they argue that the growth and innovation in the crypto space creates new opportunities and use cases for crypto assets beyond speculation and store of value. Some of these use cases include:

• DeFi: offering open, permissionless, and transparent financial services using smart contracts and blockchain technology. DeFi applications include lending, borrowing, trading, investing, insurance, payments, and more.
• NFTs: can be used to represent ownership or rights to various types of digital or physical assets, such as art, music, games, collectibles, sports, etc. NFTs offer authenticity, scarcity, provenance, interoperability, and creativity more than traditional forms of ownership or rights.
• Layer-2 solutions: can improve the scalability, speed, and efficiency of existing blockchains. Layer-2 solutions enable more transactions per second (TPS), lower fees, and better user experience for various applications, especially DeFi and NFTs.
• Stablecoins: typically pegged to or backed by fiat currencies or other assets to maintain a stable value. Stablecoins offer lower volatility, faster settlement, and easier integration than fiat currencies or other cryptocurrencies. Stablecoins are widely used as a medium of exchange, a unit of account, and a store of value in the crypto space.

These developments have attracted more users, developers, and investors to the digital asset ecosystem.

So Things Never Change?

Opponents of the proposition argue that the recent developments are opportunism rather than being indicative of a fundamental shift in the attitude or behavior of traditional finance participants. Similarly, they argue that the regulatory environment for crypto assets remains uncertain and even hostile in some jurisdictions. The SEC has recently sued two of the largest crypto exchanges in the world for allegedly violating securities laws and offering unregistered products. They have rejected multiple applications for spot bitcoin ETFs and oppose the conversion of the Grayscale Bitcoin Trust (GBTC) into an ETF. Moreover, regulators in other countries have imposed restrictions on crypto activities or even bans, as seen most recently in Pakistan, despite the IMF's recent advice that banning crypto "may not be effective in the long term."

These regulatory actions have created a lot of fear, uncertainty, and doubt (FUD) in the crypto space. They could risk affecting the legality and viability of various crypto platforms and products. They could also discourage or prevent many potential investors and institutions from entering or staying in the crypto space.

In contrast, they argue that mainstream investors' and institutions' adoption and integration of crypto assets suffered a setback after the events of 2022, and even proponents such as BlackRock see institutional adoption of DeFi "Many Years Away." According to a recent survey by Fidelity Digital Assets — to be taken with a pinch of salt as it was conducted in H1 2022 before digital asset markets were roiled by risk events — "adoption of digital assets among institutional investors surveyed increased in both the U.S. (42%) and Europe (67%), a respective 9-point and 11-point change year-over-year. Though they reported a small decline in adoption, Asian institutional investors remain the most accepting of digital assets among the regions with nearly 7 in 10 (69%) reporting an allocation to digital assets." On this basis, institutional capital is already involved —  albeit perhaps in less flexible ways —  so detractors question if these developments will bring in significant amounts of capital with the integration of crypto assets into their mainstream operations and portfolios.

Moreover, they argue that the fragility and volatility of the crypto markets expose the vulnerabilities and risks of the crypto space. The price of bitcoin has been above $30,000 multiple times in 2023, but it has also faced several corrections and dips along the way and has yet to recapture the heights of H1 2022. The volatility of the crypto markets deter many potential investors from entering or staying in the crypto space should the Global Economy slow and exhibit recessionary conditions.

Furthermore, they argue that the cyclicality and seasonality of the crypto markets suggest that the recent developments in the crypto space may not be sustainable or indicative of a long-term trend. The crypto markets have historically gone through multiple cycles of boom and bust. The current cycle has seen an elongated crypto winter, and price trends of what is often an inelastic asset class have yet to confirm we are at the thawing of spring.

Finally, and perhaps most powerfully, detractors point to the narrow subset of digital assets covered by the recent announcements. Most are focused on BTC, with the EDX announcement additionally covering ETH, LTC, and BCH. Set this in comparison to the 26,036 tokens listed on coinmarketcap.com as of 28th June 2023. There is a disconnect between the narrative of institutions broadening digital asset adoption compared to the broader array of digital assets.

Conclusion

Recent developments in the crypto markets have shown a welcome resurgence in interest from Traditional Finance participants; And even if that interest is relatively narrow for now, it is objectively welcome in a timeline void of positive tailwinds. However, as enticing as the headlines may be, institutions remain rightfully vigilant as they explore and shape a regulated integration of digital assets into their mainstream operations and portfolios.

Therefore, while this time may differ in terms of the quality and diversity of Traditional Finance participation in digital assets, it may not be different enough to signal the paradigm shift in mainstream investors' adoption and acceptance of digital assets that some proclaim. The crypto space is still evolving and facing many challenges and uncertainties that could affect its future prospects and performance. Additionally, it is important to reiterate that the developments discussed focus on a handful of tokens and not the long tail, suggesting that an altcoin rally may be further away than most market participants desire.

Here at Hivemind, our investment philosophy is grounded in the fundamental evaluation of the merits of each token before it is overlaid with game theoretic and economic modeling, as well as risk management in the broader portfolio. Knowing both the what and the why behind every asset in our portfolio empowers a balanced approach between alpha generation and beta protection. Ensuring that those tokens will make it through to the next digital asset cycle has never been more relevant than it is now. As digital natives, we are —  unsurprisingly —  biased in believing that the digital asset ecosystem has a healthy future and one that we are excited to participate in. We believe we will continue to see broader institutional and enterprise adoption through time, and we remain committed to our objective of institutionalizing digital asset investing.

About Hivemind

Hivemind Capital Partners is a Web3 and blockchain technology-focused investment firm. Hivemind is committed to institutionalizing digital asset investing and combines crypto-native technology and expertise with institutional-grade risk management and practices. With a thesis-driven and multi-strategy approach, Hivemind unlocks the potential of digital assets to be an investable asset class by providing curated and scalable access to institutional investors. Founded in 2021, Hivemind is headquartered in the US with offices across the globe.