Asset Managers Find Digital Assets Irresistible

This week we’re sharing a blog post from GemCap UK Chairman Jonny Fry, on the bright future of digital assets and why they matter for asset managers.

Venture Capital (VC) funds invested a record $8.8 billion into blockchain and Digital Assets in the first half of 2021, hitting an all-time high . One of the most active VC firms, Tiger Global, had invested most of the $6.7 billion fund it raised in March by June. In Tiger’s recent update to investors, it reported that it had consistently underestimated the market for private tech companies. Six months earlier, data suggested a $3tn market opportunity. It was now closer to $5tn”. Indeed, Tiger Global has been one of the most active investors in companies engaged in Digital Assets, such as Amber, Coinbase, Babel and Coinswitch Kuber, to name just a few. Unsurprisingly, it is difficult for asset managers to ignore earnings that have exploded by more than 16 times in July compared to June, which is exactly what the Axie Infinity token (Axie) did in July, generating $190 million in revenue. In June, Axie, with its Non-Fungible Token ‘pet’, demonstrated the opportunities which gaming firms offer by enabling gamers to earn as they play. The company’s game went viral in the Philippines where 60% of its gamers come from. Earning $110 a day playing Axie is a considerable sum in a country where the average income in a month is only $250.  Axie’s token price has risen from $3.6billion on 27th June 2021 to over $49billion on 27th July 2021. Performances such as this are difficult to ignore, especially when the turnover for Axie has ranged between $120million to $7.5 billion a day, according to Coingecko – phenomenal liquidity for such a new organisation offering institutional buyers the ability to trade reasonable positions.

Historically, investors had simply bought a crypto such as Bitcoin or Ethereum, possibly because they were the two largest and most actively traded cryptocurrencies. However, as evidence mounts that such a narrow ‘buy and hold’ strategy has underperformed other investment strategies, asset managers’ attention is turning elsewhere.

Crypto asset performance. Source: Aaro Capital

As pointed out in a recent article by London-based Digital Assets manager, Aaro Capital: “The above chart shows the compounded returns of the average cryptoasset fund against a buy-and-hold investment in BTC and ETH or a value-weighted portfolio based on the top 100 assets by market capitalisation. The left panel shows the compounded returns for the whole sample from March 2015 to June 2021. The red vertical line indicates February 2020, i.e., the initial stage of the COVID-19 outbreak. The right panel shows compounded returns for the sample starting in February 2020, that is, assuming the initial investment is made right before the outbreak of the COVID-19 pandemic”

A recent survey by Goldman Sachs found that 46% of family offices are interested in cryptos and, interestingly, it cites reasons including concerns about potential higher inflation rates in the future. Nadine Chakar at State Street would appear to sum up the current sentiment and explains a possible reason for the ongoing interest in cryptos “We are at a tipping point now where this is moving fast. We are getting calls from endowments and foundations that are getting donations in crypto and saying, what do we do with this? We are seeing companies that are thinking of adding crypto to their balance sheets. The growth in popularity of digital assets is showing no signs of a slowdown and State Street Digital is committed to continuing to build out the necessary infrastructure to further develop our digital assets servicing models to help meet our clients’ growing demands.” State Street is the US’s second oldest bank, with $3 trillion of assets under management and one of the world’s largest custodians globally. In the same vein, Sean Taor, head of European debt capital markets at Royal Bank of Canada, has reported: “I think blockchain has a real future in debt capital markets. If you can use blockchain from start to finish, you take out a lot of the costs, a lot of the risks in terms of counterparty and settlement risks.”

One sector attracting increasing institutional interest is Decentralised Finance (DeFi), especially for asset managers who are looking for income. Index Cooperative, with over $240million of assets under management, has created a number of Digital Asset indices, such the DeFi Pulse Index (DPI). The DPI is an index, similar to the FTSE 100, Nikkei 225 or the S&P 500 in that it enables investors to buy one token which, in turn, offers exposure to a portfolio of DeFi assets. Ratty Chief, investment officer at Man Group (one of the UK’s biggest fund managers with over $135billion) believes that machine-driven quant funds will continue to grow in importance as a way to manage assets. The NASDAQ has been working on ways to disseminate information, improve liquidity and trading of private (non-quoted companies) using Blockchain technology for a number of years. For over 2 years HSBC has been using Blockchain technology for $20billion of its client’s holding of private assets. Even International Swaps Derivative Association (ISDA) has written to the Financial Accounting Standards Board (FSAB) asking for cryptos accounting to be put on its agenda as demand for this asset class grows. As assets are digitised, it becomes easier for quant-based funds to gather more data and trade 24/7 in ways that historically were just not possible.

The growth in interest to trade and hold Digital Assets signifies that service providers, such as exchanges, banks, custodians, trustees, auditors, administrators etc, are being required to change their systems and procedures to be able to handle these assets on behalf of their asset management clients. This, in turn, is also encouraging Fintech firms such as Coinfirm, Copper, Alaco and Monsas to offer new Digital Asset services around payments, forensic investigation, custody, administration, AML etc. 

Have a great weekend.

Jonny Fry

Chairman,

GemCap UK Limited

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