Professional traders laugh at crypto, but trade it anyway: “Market structure is changing”

[ad_1]

As crypto sheds its stigma as a convenient channel for criminals and money launderers, banks have so far acted cautiously.

Goldman Sachs and JPMorgan are among the big banks that have taken to trading crypto – not crypto per se, but futures and other instruments – to reap the volatility and potential returns that armchair traders enjoy. and HODL fanatics during the pandemic.

This growing institutional interest is changing the architecture of the market, according to research firm Coalition Greenwich.

“The market is shifting from cash trading and physical ownership, for example, holding bitcoins, to ownership of physical and financial instruments, with the market adopting traditional financial products such as digital asset securities, contracts futures, options and exchange-traded funds and products, “market structure and technology adviser David Easthope wrote in a report from Greenwich this month. “As traditional institutional investors, fund companies, custodians and banks become active in digital assets, the structure of the market is changing. “

Company data shows ETFs and other crypto-related products are preferred by 61% of buy-side institutions, compared to 27% who want direct physical ownership.

How it all plays out depends on the scaffolding of the digital asset market as it grows and the important role that regulators will play in the future – the last thing a financial institution wants is to be prosecuted. Currently, mainstream financial firms are loath to hold cryptos locally “due to its nature of a bearer instrument,” says Easthope, which means that it behaves much the same as a dollar bill. £ – no ownership data, no registrations, no registration rules all transfer.

It’s terrifying for financial institutions that are thoroughly regulated, forced to provide details on custody and security, not to mention already onerous bank capital requirements.

Easthope says most mainstream finance now accepts crypto “not as a flash in the pan but as a new asset class that needs to be looked at closely.” But, in particular, he adds: “Certainty is not a given.

In the meantime, the macroeconomic environment – the skyrocketing inflation, the bull market for equities for more than a decade – plays a key role in the surge in demand for crypto.

Goldman Sachs, which said earlier this month that it expects bitcoin to hit $ 100,000, sees crypto as a hedge against rising inflation and could take market share from gold. Bitcoin’s $ 700 billion market cap commands about 20% of the “store of value” space – which Goldman defines as bitcoin and the value of gold used for investment combined.

Also driving demand: the stock market boom, which hits everyone and anyone who is not a passive bull is content to ride the index.

With a few exceptions, most hedge funds haven’t been able to outperform the S&P 500 in 2021. Understandable – the benchmark has climbed 27%, but for companies that charge high fees and employ the best and the brightest on the market. stock pickers, it’s still embarrassing.

For funds that invest in crypto, however, 2021 was a different story. Hedge fund data firm HFR found that funds investing in cryptocurrencies led all hedge funds in 2021, with the HFR Cryptocurrency Index surging 215%. That beat the 2020 return by a little less astonishing 193%.

It is therefore telling that, while the CEO of Man Group, one of the largest hedge funds in the world, told the Financial Times last year that crypto has “no intrinsic value”, he said that his funds were moving forward and exchanging them anyway. Volatility is just too tempting to pass up. JPMorgan’s Jamie Dimon echoed similar views, saying “bitcoin is worthless” when setting up a unit of digital assets at the bank.

Indeed, Dimon added a caveat regarding JPMorgan customers: “If they wanted to have access to buying or selling bitcoin, it’s difficult – we can’t keep them, but we can get them legitimate, as clean as possible. access.”

Hedge fund boss Paul Britton, CEO of Capstone, told Financial News this month: “We have exposure to crypto, but that’s because we follow certain trends. We don’t see it as a long-term store of value in portfolios.

Professional bank traders are just as pragmatic. A London stock trader told FN last year that he and his banking friends gamble in the crypto markets through their personal accounts, or PA: “I never had a PA because I would be fired. But I am invested in over 10 cryptos because they are not even mentioned. My compliance officer literally said, “Please don’t talk to me about cryptos. I would prefer that I didn’t know.

Since many banks do not trade physical crypto, there is no conflict of interest between employees, so compliance departments can sleep at night. For risk-addicted traders, believing in the viability of the underlying asset class is irrelevant.

This is the paradox of crypto when it comes to banks, hedge funds, and large professional traders: the smartest in the market may not think crypto is here to stay. But for now, as the markets are ripe and regulators are hard pressed, they’ll be damned if they don’t try to make money anyway.

To contact the author of this story with comments or news, email Trista Kelley

[ad_2]