To paraphrase John Maynard Keynes, “when facts change, it’s time to change your mind”
by Seamus Donoghue, VP Sales and Business Development at METACO
The crypto bubble was exactly that: a bubble of overexuberance that, when punctured, would lead to a brutal rebasing of valuations and a huge dent in sentiment. But, even though many could see it for what it was, they got carried with their fatalistic prognoses. As one famous banker put at the time:
“It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed. It’s just not a real thing, eventually it will be closed.”
What the doomsayers forgot is that bubbles are not just normal, they are essential. As Bill Janeway explains in his excellent “Doing Capitalism in the Innovation Economy”, bubbles result in an influx of hot money that funds the productive phase that follows. A lot of the money that flooded into ICOs and a lot of money that people made from cashing out their bitcoins went into building the scalable infrastructure for what comes next.
The future of decentralized finance is now being realized. It will be a fairer and more inclusive financial system.
Tokenization will lead to a democratization of asset ownership and corporate funding, a market predicted by the World Economic Forum to be worth $24 trillion by 2024. Free and frictionless payments will provide a boost to e-commerce and international trade. And with everyone having a wallet and a financial identity, we will finally have a fully banked population.
The question those who are still skeptical pose, however, is this: if the opportunity is so structurally important, why does it still seem so far off?
A look at the tokenization market today still shows a lack of secondary market liquidity and low issuer quality. It’s difficult to avoid the perception that this is a market still in its infancy.
My response is this: come for the crypto, stay for the tokenization. What I mean by that is that the crypto market is plenty big enough today, at over $350bn, to justify a tactical investment in the infrastructure for trading and custody. Once that investment is sunk, then all that comes later – such as a thriving tokenization market – represents unpriced upside potential. Investing in crypto now is a premium-free option on a much larger downstream revenue opportunity.
Why, then, is it still hard to convince organizations to invest in crypto today?
Well, in short, it’s because institutional views are still anchored in the pre-bubble world of Silk Road and crazy volatility. They remain worried about:
- the AML risks, even when the industry has already solved these;
- the technology risks, even though enterprise grade technology is available;
- and the regulatory risks, even though new crypto-friendly legislation gets passed nearly every week all over the world.
But most of all they worry that Bitcoin is not a real asset class.
It’s time to take a fresh look at the crypto market
As my colleague Adrien Treccani wrote recently, we’ve been through the hype cycle and we’ve come out on the other side.
The signs that the market has moved into the slope of enlightenment are all around us:
- Growing institutional interest: with mature infrastructure and growing clarity over regulation, institutions are moving into the space in greater numbers. Our view is that we have now moved from the innovators, such as Fidelity, to the early majority of institutions, such as Standard Chartered (a METACO investor)
- Treasury management: a very interesting trend that has emerged over recent months is the adoption of Bitcoin as a corporate treasury asset. As bonds have become interest-free risks and central banks have turned on the printing presses, treasurers at companies such as MicroStrategy have warmed to the idea of putting excess cash in crypto assets; in their case, over $400m.
- Growing distribution: the Square cash app now lets its users buy and sell Bitcoin, while PayPal allows its 346m users and 26m merchants to pay with crypto, so access, distribution, and utility are growing fast
- The performance of the asset class: reflecting the above, the performance has been impressive. Over a one year view, Bitcoin is up over 90%, far outstripping the return from stocks or gold. Even if we sample longer-term horizons, such as 3 years- which strips out the effect of the bubble -, Bitcoin still outperforms. And it’s not just Bitcoin: the market for stablecoins, for instance, is growing by $150m a day as these coins perform a more critical function in remittances and other core payment use cases.
The crypto opportunity is real and it’s bigger than you might think
Hopefully, it’s clear by now that the crypto market has matured and it’s time to question many outdated or received perceptions. Once we’ve done that, we can start to contemplate the full scope of the opportunity. Because, as big as the $24 trillion tokenization market sounds, it is tiny when compared to the $350 trillion traded on global capital markets, which is more likely to be the medium-term prize.
Incumbents are best-placed to capture this opportunity. It’s true that many bank revenues – from payments to loan origination – are being captured by fintech and big tech players. So, it makes sense to diversify and digital assets represent a compelling opportunity. Not only is it a massive potential market with low asset intensity, but incumbents are extremely well-placed to capture it:
- they are trusted,
- they are already regulated,
- they are experts in asset management and structured products,
- and they already have the customer base into which to offer these services.
What is more, by taking a fresh look at crypto, financial institutions can catalyze a virtuous cycle by themselves. Up until now, the market has suffered from a lack of trust. Consumers and their banks perceived there to be significant risks around digital assets, which prevented them from investing large sums, while also discouraging custodians from investing in technology.
This is now changing. Custodians and other institutions are investing in the infrastructure to safeguard the market, which is beginning to put in motion a virtuous cycle of increasing trust and increasing flows.
Is it time to change your mind?
The market opportunity is real and growing fast. The business case for investment can be justified on the basis of the market today, leaving the structurally important market of tomorrow as unpriced upside. Many institutions are realizing this, including the once skeptical ones.
The quote about tulips at the top of this piece was from Jamie Dimon. Jamie Dimon has since presided over the launch of a JP Morgan coin, the decision to become the banking partner to Coinbase and, most recently, the launch of Onyx, its blockchain network.
METACO offers secure, scalable infrastructure for financial institutions looking into the trading, tokenization and custody of digital assets. We’re used by regulated institutions all over the world and in Q1 2021 our SaaS solution will be available, so institutions of all sizes can deploy enterprise grade technology.