Perhaps due to its inherent structure as a decentralized financial system, the cryptocurrency market has sometimes been described by people both inside and outside of the investment industry as being something akin to the “Wild West” when compared to the traditional centralized banking system.
And yet, when looking at the explosive growth in the adoption of digital assets by institutions, there would seem to be an increased confidence in the maturation of the market among the world’s most sophisticated investors. The institutional expansion into crypto was especially pronounced in the first half of 2021, as Coinbase saw an increase in the number of institutional investors transacting in record-sized trades, executing nine- and 10-figure trades in large-cap cryptocurrency assets via its prime broker Coinbase Prime.
But because the crypto market is still relatively young and moves at such a rapid pace, many institutional investors, whether they sit on the fiduciary or asset management side, probably still have questions - and, yes, doubts - about the resiliency and the safety of the crypto market. This is especially true for those who are either new to the space or still in the process of doing their due diligence before deciding whether or not to invest in digital assets.
In part one of a five-part Q&A series on building a foundation for crypto investments, John D’Agostino, director of institutional sales at Coinbase, who oversees strategic partnerships for the company, discusses some of the common misconceptions investors might have about the crypto market - and why investing in digital assets can sit side by side with some of the other assets in a typical institutional portfolio.
Q&A: John D'Agostino
How do you view the institutional appetite for crypto right now?
John D’Agostino: If your job is to turn money into more money then of course you’ve looked at crypto. It doesn’t mean you’re going to do it. It’s just that your job is to look at everything and get smart on everything. And I believe there is someone in the bowels of every pension fund who will be above the level of a lay person on crypto. What you want to focus on then is gaining a deeper understanding of the market infrastructure.
In terms of market infrastructure, you still hear some people referring to the crypto market as being like the frontier days in the Old West. What do you think people are missing?
JD: I think with some people, the way they think about safety and security of the market infrastructure is anachronistic. They’re talking about the way it was five years ago - and five years ago in crypto might as well be 50 years in traditional markets. You don’t have to buy or trade bitcoin; you don’t have to engage in crypto as an asset class if it’s not right for your program’s goals. However, if the reason you’re not engaging is you think this is the Wild West, you are thinking incorrectly.
What metrics and data points should investors be looking at to give them confidence in this market?
JD: You can look at the bitcoin uptime, you can look at the liquidity data and the fact that we can do a half-billion trade and not move the market because there’s now an exchange and prime broker with the institutional-level trading services that can support these transactions, and the advanced data analytics to help prevent market slippage. What does that mean when you have low slippage levels? It means you have depth and breadth of market. It means you have a resilient market. It means you have the systems in place to prevent the leaking of large orders.
What would you say to investors who might be concerned about the crypto market, given the volatility they may see?
JD: You have to put volatility in context: As opposed to just looking at the top-line volatility, it’s important to understand that volatility tends to occur after you’ve experienced huge gains. It’s thinking about the Sortino ratio vs. the Sharpe ratio.
In terms of stability, look at the market stability and safety of the crypto market vs. commodity futures. You may not invest in commodity futures, but you also wouldn’t be shocked if your CIO came to you and said your fund was going to invest in commodity futures. And these two markets aren’t that different in terms of safety, stability and infrastructure.
Finally, how do you view the security of the crypto market?
JD: Crypto is often compared to a bearer instrument, a bearer bond. And at one point that’s what it was because you had to keep your keys on a piece of paper somewhere and it was effectively the equivalent of bearer instruments. But we’ve moved well past that. Now, given the institutional options available like Coinbase, the experience of holding crypto is not any different from having a checking account in that you have to provide AML, and we have to know your identity. And your keys are guarded just the way your online password is guarded.