When I grow up ── I asked a traditional finance expert what is necessary for the future of crypto assets | coindesk JAPAN | Coindesk Japan

The future of crypto assets (virtual currencies) depends on investors in traditional finance (TradFi). I’m not talking about banks or asset managers, but rather investors entrusted with the long-term, continuous management of large funds, such as pension funds, endowments, foundations, and large family offices. Money from these institutional investors is needed for crypto assets to reach their transformative potential.

We spoke to 15 investors to understand how they think about crypto assets. None of them can be called enthusiastic about crypto, each managing a multi-billion dollar portfolio.

My question is, “Given the events of 2022, what will convince you to invest in crypto-related opportunities? What opportunities would you consider investing in?” In addition, he added a condition that he should avoid answering “improvement of regulations.”

From the answers, we can see five important points that will help the future of crypto assets.

“Crypto assets and blockchain will never go away”

Crypto-related events in 2022, namely the decline in crypto assets such as Bitcoin (BTC) and Ethereum (ETH), the credit crisis and its contagion, did not affect respondents’ convictions.

Reactions to last year’s events have been optimistic (what happens in 2022… doesn’t mean much to me or crypto), fatalistic (thinking we know what we’re doing Cryptocurrency will crash a few more times until the system is established enough to trust the parties involved), or in good spirits (crashes are welcome).

Several thought it was a “necessary drop” that would lead to an even healthier ecosystem. Overall, no one thought 2022 meant the end of crypto.

Rather, they generally agreed with the opinion of a fund’s chief investment officer, who said that “crypto assets and blockchain will never go away.” But they also agreed that the future of crypto would have to be different in order to invest any amount of capital in it.

“Crypto assets are looking for solutions to problems”

According to respondents, the future of crypto assets does not include investing in trading strategies. The managing director of a large family office strongly insists that he is not interested in crypto assets as a currency. The head of pension operations at a company said he views cryptocurrency trading as “reckless gambling.”

Respondents also all dismissed the economic rationale often used to support an allocation to crypto: uncorrelated assets, stores of value, and inflation hedges. One respondent concluded that these claims were “hypothetical.”

“It’s time for crypto assets to grow up”

The future of crypto is in great crypto companies, not great crypto products.

For respondents, 2022 was a watershed year for crypto. He sees crypto as a transformative technology that will lead to much-needed innovation, but so far he sees the crypto ecosystem as a “hollow gathering that incentivizes those who contribute little to value creation.” ing.

One investment consultant described the crypto ecosystem as “a hobbyist industry made up of a small subset of tech-savvy users.” “The hot spot in the crypto world is not important for institutional investors,” he said.

To attract institutional capital, the status quo must change. As one family office investor put it, “It’s time for crypto to come of age. Crypto people have to stop building products for other crypto people.” Another said, “Right now we’re dreaming and optimistic.”

The person in charge of VC investments at the family office said that to move from fantasy to reality, the ecosystem needs to be “a better solution than the current one at solving real-world problems outside of the Web3 ecosystem.” (Infrastructure and applications) “we need to start building”. That means faster, cheaper, better user experience, and so on.

Respondents believe that these solutions must be underpinned by a definable and sustainable business model in order to be considered for investment. Incidentally, such a business model is not a DAO (Distributed Autonomous Organization). “DAO is not a way of doing business. What the heck is a governance token?” said one respondent.

Respondents are fed up with presentations by crypto evangelists and consultants that “completely ignore the difference between products and businesses,” one affirmed.

“This year, when I listen to cryptocurrency presentations, I will interrupt them and ask about the business model. In the past few years, the distinction between product and business has been completely ignored.”

Importantly, all respondents believe that business models must be scalable. For one respondent, it means “distributed projects and investment opportunities for the general public that are more efficient than centralized ones.”

Another respondent was more specific. He emphasized that “the largest market that can be acquired is projects and investments of 10 million to 100 million people” and that “crypto assets need a moment to trigger general adoption.”

“Generation change of crypto assets and basic technology is necessary for popularization”

The future is still far away. Respondents pointed to multiple structural issues that hinder investment. For example, the difficulty and time required to build a sustainable and scalable cryptocurrency business, and resistance from legacy organizations that benefit from centralized structures.

In addition, some respondents raised a larger, but less obvious, problem. This is the current worldview of institutional investors. Respondents believe broad crypto investment will require a two-step “generational shift”.

For decades, the worldview of traditional financial investors has been confined to the norms codified in CFA and MBA curricula. One respondent called it “not an endorsement of crypto-related investments,” adding, “If we can get rid of that mindset, in five years we will have the innovation we desperately need.” I would,” he continued.

In addition, investors should recognize that the large unbanked customer base in emerging markets, particularly in the Global South, is the source and beneficiary of many scalable investment opportunities, not just in their home countries. be. “Boston investment committees don’t think about crypto assets the same way young people in the global South do,” said one investment consultant.

“Anything that passes for due diligence is ridiculous.”

Good due diligence is also essential for the future. Rigorous due diligence is required to be confident that any crypto-related investment opportunity is based on a stable and scalable business model.

Respondents generally invested in private markets through funds, so they expected asset managers to use proven, proprietary due diligence processes to scrutinize their crypto investments. there is

However, many high-profile funds and asset managers have overlooked (or ignored) the Celsius Network and FTX’s numerous red flags, prompting respondents to overhaul their fund’s due diligence process. stopped trusting. For example, one respondent said, “Anything that qualifies as due diligence is ridiculous.”

The investment managing director of a Canadian pension fund echoed that sentiment, saying, “Many people are terribly lazy and don’t dig deep enough.”

Respondents acknowledged that crypto-related investment opportunities present unique challenges that require specific knowledge that even the most seasoned investor lacks. Noting the investment in Celsius by the Quebec Pension Fund in Canada and the investment in FTX by the Ontario Teachers’ Pension Fund in Canada, the Chief Investment Officer of the American Pension Fund said, “You can’t do due diligence on something you don’t understand. I can’t,” he pointed out.

Many of the respondents agreed with the chief investment officer of a corporate pension fund, who said that managers are under too much pressure.

“A lot of deals go very fast, and when you get a call, you have to make a quick decision.

Another said, “FOMO only works when there’s a tailwind.”

This informal survey suggests that while institutional investors are bearish about their crypto investment strategies, there is a long-term outlook for crypto as a transformative technology if underpinned by a clearly scalable and viable business model. proved to be strong. To capitalize on these technology-based opportunities, investors need to change their worldview. And we need better due diligence.

The crypto ecosystem has so far been bound by traditional financial conventions. But the crypto ecosystem will have to shoulder its shackles if it is to earn the trust to attract the institutional capital it needs to transform from a guild to an industry.

Dr. Angelo Calvello: Co-founder of Rosetta Analytics, an asset management company that uses deep reinforcement learning to build and manage investment strategies for institutional investors.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
| Image: Etienne Boulanger/Unsplash
｜Original: ‘It’s Time for Crypto to Put on Big Boy Pants’: 5 Ways TradFi Investors Are Rethinking Crypto in the Wake of FTX