Despite the global economic stranglehold of COVID-19, the digital asset investor market continues to mature from its retail and crypto-fund roots any larger and more conservative institutional investors are allocating for the first time.
According to a Coinbase report for Q1 2020, they are seeing institutional investors using Coinbase to build direct positions and backing crypto fund managers as part of their alternatives strategy.
“We saw a noticeable uptick in our institutional business’s growth in H1 and continued to add leading university endowments, traditional multi-strategy hedge funds, VCs, and large family offices to our roster of clients buying digital assets directly. Greater visibility of reputable investors warming up to digital assets has fueled confidence among this community. Tudor Investment Corporation this May by disclosing its BTC position.
CEO Paul Tudor Jones further argued that:
“…the best profit-maximizing strategy is to own the fastest horse…my bet is it will be Bitcoin.”
Jones made his case against the backdrop of what he called “The Great Monetary Inflation,” highlighting central banks’ record monetary expansion in 2020 as a potential catalyst for BTC.
“Investors are still in the early days of untangling the relationship between macroeconomic policy and crypto, but we are seeing a growing base of our institutional clients organizing around the thesis that BTC, specifically, provides exposure to an alternative monetary policy system with supply mechanics that are diametrically opposed to those of central banks in 2020: scarcity versus expansion, predictability versus uncertainty, decentralization versus centralization, software versus humans.”
From a product standpoint, institutional investors are demanding deeper capabilities to help them allocate and trade, and Coinbase added they are building market-leading brokerage services in response to this client demand.
“Our approach is to rebuild the core businesses of traditional prime brokerage that investors expect – custody, trading, and lending – but optimized from the ground up to take advantage of digital assets’ unique characteristics.”
Custody: Since launching in July 2018, Coinbase Custody has grown rapidly and expanded its lead as the industry’s largest player. It's Qualified Custodian, a limited purpose New York trust company regulated by the New York Department of Financial Services, secures digital assets in fully segregated cold storage on behalf of leading endowments, venture funds, hedge funds, private equity funds, family offices, and RIAs. They do not view digital asset custody as a commodity, but rather as a powerful piece of infrastructure which, if designed correctly, supports investors’ fiduciary duty to protect LP assets and maximize their returns.
Trading: Today, Coinbase operates the largest regulated exchange in the world – a central pool of liquidity that combines the assets of its 35mm retail users and institutional clients. In H1 2020, the digital asset market continued its evolution towards multi-venue best execution, in which clients expect to route trades through brokerages that aggregate liquidity and offer advanced execution algorithms. They recently accelerated this transition and Coinbase will integrate multi-venue execution going forward. This will allow for significantly larger orders with minimal price slippage via its brokerage. Clients can also benefit from detailed transaction cost analysis (“TCA”), enabling them to better understand their cost basis and fees on every trade.
Lending: Coinbase provides margin trading and delayed settlement to our institutional clients on a limited basis, and they are currently scaling our credit programs further across both fiat and digital assets in response to client demand. They say they will continue to develop their lending business to expand the scope of what’s possible for clients while taking a professional approach to risk management and ensuring health across Coinbase’s underlying markets.