Financial Institutions Are Embracing Crypto

This year has seen vast capital inflows into crypto currencies. Nevertheless, the amount pales in comparison to the substantially larger investments that will come from institutional investors and financial advisors in the months and years ahead. Up to now, large and professional investors have been missing the security and many of the tools they need to enter the crypto market. Legolas Exchange is embracing this future inflow and is offering to build these functionalities which will equally benefit both existing and incoming investors and traders.

Alternative Investment Is in Vogue

Over the last 10 years, institutional money managers have been steadily increasing their holdings in alternative investments in order to diversify their portfolios and increase expected risk adjusted long term returns. According to PriceWaterhouseCooper, by 2020 global assets in alternative investments will grow to US$18.1 trillion, from $10 trillion today. This large and growing allocation means that institutional investors such as wealth managers, endowments, investment funds and sovereign wealth funds are constantly looking for new asset classes and products that present positive growth expectations. Crypto currencies and digital tokens are perfectly positioned to be one of the leading investment class and receive a large proportion of those 18 trillion dollars.

Cryptocurrencies Are Outperforming Majors Assets by Far

One of the most telling metrics supporting the thesis that financial institution will invest heavily in crypto currencies is that the performance of cryptocurrencies has outshined the returns seen by equity benchmarks over the last few years. Bitcoin return has outperformed the S&P 500 by a factor of 35 since April 2013. Even when using the Sortino ratio, a measure of risk-adjusted return, Bitcoin has largely outperformed all asset classes over the last seven years.

A Near-uncorrelated Asset

In a globalized world where markets are becoming more interconnected, building a stable portfolio made of diversified investments is increasingly difficult. Finding uncorrelated investments is both challenging and incredibly rewarding for an institutional investor looking to create a diversified portfolio with stable long-term returns. In this context, one can calculate that the correlation between Bitcoin and the S&P 500 over the last 5 years is almost 0 (3% to be exact). This incredibly low correlation is attractive to large investors as a way of reducing their portfolio risk.

In fact, Bitcoin can even serve as a hedge against harmful geopolitical events due to its decentralized nature. There is a growing body of empirical evidence supporting this thesis with, for example, bitcoin price spiking in response to both Brexit and the election of Donald Trump. This calculation can be extended to other financial asset classes such as bonds, commodities, real estate and currencies with similar results: cryptocurrencies present a unique combination of positive expected growth and no correlation to established investment opportunities.

A Growing Demand for Crypto Assets

Digital currencies have found favor among individual investors, but remain a niche among the wider investment community. The growing demand by all types of investors for digital currencies has had a positive effect on the financial industry, leading them to view cryptocurrencies and digital assets as a major new market opportunity for their investors and clients. One of the best illustrations of this attempt by financial professionals to enter the crypto market are the many endeavors, both successful and unsuccessful, to create indices and securities that would track the price of Bitcoin or ICO performance. While ETFs (Exchange Traded Funds) have not been approved in any country yet, several financial institutions are currently petitioning regulators in North America, the United Kingdom and continental Europe. Sweden already has an ETN (Exchange Traded Note) tracking the price of Bitcoin listed on the Stockholm stock exchange with a market capitalization of $90M. Seven global banks (BNP Paribas, Societe Generale, CitiBank, Barclays, Goldman Sachs, Banco Santander, Standard Chartered) have announced plans to integrate future use of blockchain and cryptocurrencies. These evolutions will continue to mature and accelerate in the coming months and years, opening a flood of investments intro cryptocurrencies and digital assets. Saxo Bank analyst Kay Van-Petersen estimates that cryptocurrencies will account for 10% of the average daily volume of fiat currency trades within 10 years, with Bitcoin alone accounting for $175 billion a day.

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