Thursday, 26 October 2017

How you have an advantage over institutional investors

It’s not often that individual investors get the upper hand on the big institutional asset managers

Credit: Cristopher Minese/Mashable
There is one frontier asset class where you truly hold the advantage over the bigger guys and that is in cryptocurrencies. Right now the current total market capitalisation of the cryptocurrency space is approximately US$160 billion (Bitcoin accounts for around 45% of the total, followed by Ethereum at around 20%). This is still extremely small when you consider that it’s the same size as the market capitalisation of the Walt Disney Corporation or Intel.

Cryptocurrencies going institutional
There is obviously a lot of interest in cryptocurrencies as a new financial asset class from big institutions, despite China’s recent actions to ban cryptocurrencies. Right now there aren’t enough “bridges” between traditional asset managers and this new, less well-understood arena of cryptocurrencies. Let’s say you’re the manager of a sovereign wealth fund and you’re interested in making a small allocation to cryptocurrencies. Instead of building an internal team, you would likely look for people with strong backgrounds in asset management, who have transitioned over to crypto and who know how to responsibly invest other people’s money (ie institutional level security, compliance and reporting etc). The institutional level of participation in cryptocurrencies is still very very small by any measure… but it’s increasing.

What does this mean?
This means we will likely see much greater sums of money flow into cryptocurrencies over the next year or so and Bitcoin is likely to be the biggest beneficiary. A sovereign wealth fund or endowment manager that wants to buy cryptocurrencies needs to jump through a lot of hoops. There are all sorts of compliance required, legal opinions, not to mention expanding the scope of your investment mandate (which defines what assets you can invest in) – which is no easy task. But all you really need to do is open a cryptocurrency exchange account and allocate a little bit of money towards bitcoin. You have the opportunity to “front-run” a wall of institutional capital that will likely pour into cryptocurrencies as the asset class becomes increasingly mainstream and increasingly difficult for asset managers to ignore.

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