Following the “Smart Money”

Smart money was originally a gambling term that referred to the wagers made by gamblers with a track record of success. In the investment industry, “smart money” is considered to be the capital that is being controlled by institutional investors, central banks, funds, and other financial professionals.

It was only last November that the market cap of Bitcoin and the crypto market hit an all-time high. Almost a year later, both are down 70% or more, and interest among retail investors has largely dried up.

According to the crypto exchange Cointree, the Fear and Greed Index “uses social signals and market trends to determine the overall sentiment of the crypto market, based on bitcoin and other large cryptocurrencies”. At the time of writing, the index sits at 20 which is “extreme fear”.

However, if I were to follow the smart money in 2022, it would be leading me towards crypto. Looking at the price and action of bitcoin and the rest of the crypto market over the last year, it looks like the institutional money is following Warren Buffet’s advice – “Be fearful when others are greedy, and greedy when others are fearful.”

Some of the largest institutional managers in the world are getting involved in, or deeper into, the crypto economy. This makes me believe that they are not only going to be major beneficiaries of the next bull-run, but they are also laying down the infrastructure that could help make it happen.

Of course, there can be no assurance that these institutions will be successful in their crypto endeavours, and this article is not a recommendation to any potential investor to “follow the smart money”.

Blackrock makes two major announcements

BlackRock, the world’s largest asset manager, has launched a private trust offering institutional clients in the US direct exposure to bitcoin. This follows an announcement from the prior week of a partnership with Coinbase to help its institutional clients access bitcoin. Blackrock has continued to broaden its work in digital assets, focusing on four areas including permissioned blockchains, stablecoins, cryptoassets and tokenisation.

According to the BlackRock blog post on its website: “Despite the steep downturn in the digital asset market, we are still seeing substantial interest from some institutional clients in how to efficiently and cost-effectively access these assets using our technology and product.”(1)

New crypto exchange planned for launch

A consortium of financial heavyweights plans to launch a new cryptocurrency exchange called EDX Markets (EDXM). The companies include Fidelity Digital Assets, Charles Schwab Corp., and Citadel Securities. EDXM will cater to both institutional and retail investors and plans to “remove significant conflicts of interest that affect existing cryptocurrency exchanges”. Former Citadel Securities executive, Jamil Nazarali, has been appointed as the platform’s CEO. The launch date is currently unconfirmed. Other backers of the new exchange include Virtu Financial, Sequoia Capital and Paradigm.(2)

Nasdaq announces crypto custody service

The second largest stock exchange, Nasdaq Inc., announced it is entering the crypto industry by launching ‘Nasdaq Digital Assets’. The new business will offer institutional-grade custody solutions, as demand for digital assets from institutional investors continues to increase. According to a press release, the solution will combine “the best attributes of hot and cold crypto wallets(3) with a high degree of accessibility and scalability without compromising security”.

The new head of Nasdaq Digital Assets, Ira Auerbach, said: “We believe this next wave of the revolution is going to be driven by mass institutional adoption … I can think of no better place to bring that trust and brand to the market than Nasdaq.”(4)

Nomura launches crypto venture capital arm

Japanese-based financial giant Nomura announced the launch of a crypto-focused firm called Laser Digital Holdings. The company was incorporated in Switzerland indicating the target market is global and not just in Japan. The new company will look to offer a range of services and product lines to institutional clients in the crypto industry. The first service will be Laser Venture Capital, which will invest in DeFi, centralised finance (CeFi), Web3, and blockchain infrastructure companies.

Nomura CEO, Kentaro Okuda, said in a statement: “Staying at the forefront of digital innovation is a key priority for Nomura. This is why, alongside our efforts to diversify our business, we announced earlier this year that Nomura would be setting up a new subsidiary focused on digital assets.”(5)

Societe Generale responds to increased demand

The third-largest French bank by market cap, Societe Generale, is introducing crypto-related services. The services will cater for asset managers developing crypto funds. Using a framework that is in-line with European regulations, the services will allow asset managers to offer crypto in a “simple and adapted” way, the bank said. With plans for a slew of crypto funds starting with bitcoin and ethereum, French asset manager Arquant Capital SAS has reportedly adopted the service.(6)

Institutions have arrived

The institutions mentioned are some of the largest in the financial industry and have trillions of dollars under management. They cater to other financial institutions throughout the world and are laying down the infrastructure so that their clients can also have access to crypto, and facilitating related services.

A number of institutions are investing in and trading crypto, clearing it for themselves and on behalf of their clients, and many of them are trying to figure out how to store it.

For the next bull-run to occur, I have been adamant that three things are needed. Adoption from both institutional and retail segments, regulatory clarity, and real-world use cases.

The use-cases continue to develop, regulations are slowly being put into place and are expected to become clearer in 2023-24, but it is evident that institutional adoption has arrived. And with institutional adoption, I believe the retail participation we saw in the last bull-run will grow.