They say the crypto world is the financial frontier where anyone can strike gold, where traditional banking's old guard loses its grip, and where the 'little guy' finally gets a seat at the table. But what if, in our haste to democratise finance, we've unleashed a market that's more casino than economy? Having made the switch from traditional finance and venture capital to the cryptosphere, I've seen enough to know that our pursuit of fast riches might just be leading us off a cliff. Here's why the very thing crypto enthusiasts fear - regulation and structure - might be the only way to turn this rollercoaster into a path to true financial innovation.
Attracting The Right Herd Mentality
When the bulls are out, individuals flock to crypto but, as the bears take over, the stampede slows. This wild fluctuation isn't just a sign of market volatility; it's the symptom of an industry unchecked by the steadying hand of regulation, and the confidence that a rules based approach brings.
'Democratising finance' is all well and good, but removing barriers to entry presents its own problems. An open door policy means that the crypto markets are predominantly populated by short-term traders enticed by quick gains, overshadowing a sparse population of long-term investors who appreciate the revolutionary potential of cryptocurrencies. The irony bites hard; while the TradFi behemoth continues to churn out significant financial compensation, it acts as a deterrent for high earners to venture into the crypto wilds and bring with them a longer-term, fundamental investor mindset. Reluctance to become another vulture rolling the dice means there is a lack of fundamental traditional finance talent at the table.
Riding An Unregulated Rollercoaster
Riding a rollercoaster requires buckling up and embracing the excitement, much like the whirlwind of cryptocurrency volatility. An adventurous spirit is essential here, but the unregulated chaos calls for caution. I often find myself leaning into my traditional equity analysis skills to take a view on risk. My stint in venture capital also plays a pivotal role, especially when evaluating conceptual projects yet to generate tangible cash flows.
One massive advantage secondary market investors have over venture capitalists in the crypto space is flexibility. If the scenario surrounding a project changes, or some new information emerges, it's crucial to have the option to divest or add to existing positions instantly, which is a luxury unavailable to most traditional VCs. VCs tend to invest in silos, backing a cluster of projects around the same thesis or the same blockchain. This gives rise to concentration risk and behavioural bias.
The crypto sphere is a veritable Aladdin's cave of real-time data, offering insights and clues that can be pivotal in making informed investment decisions. Unlike traditional finance markets, which operate within fixed hours, crypto operates around the clock, continuously generating streams of data. This abundance of live data is a boon for those able to navigate; it allows for a nimble and proactive investment approach, enabling quick responses to the realtime success or failure of crypto projects.
With proper rules and structure, this wealth of live data and flexibility can be harnessed for informed strategy and finesse, rather than reckless abandon. Imagine a crypto market with clear guidelines, where due diligence, risk management, and ethical practices are the norm. The rollercoaster would still be thrilling but controlled, and the path towards true financial innovation would be paved with professionalism and transparency.
Who Said You Can't Have Rebels In Pin-striped Suits?
What comes first; regulation or the golden egg of institutional investment? Hauling institutions into crypto isn't akin to shifting mountains. It's about packaging crypto in an institutional friendly bow-tied box, being honest about the sizable risks and opportunities while showcasing an alternative investment primed for long-term growth.
For well-heeled traditional financial institutions, a regulatory jungle isn't quite the thrill ride they're after. They crave the comfort of clarity, something that isn't crypto's strong suit. Europe's MiCa regulations have attempted a shuffle towards this end, but the crypto world has its eyes set on a bigger prize: a nod of acceptance from the SEC in the US.
In the meantime, family offices appear to be the daring ones in this story, willing to dip their toes into the crypto pool, albeit cautiously and in relatively small measure. Despite the hurdles on this crypto racecourse, optimism prevails. After all, what's a revolution without a few barriers to leap over?
Going Beyond Bitcoin
While a surge of funds has funnelled into Bitcoin ETFs, it's worth reflecting on the long-term sustainability of such a passive investment approach. The crux of the matter is this: an active, value-added role in the market holds greater promise. We've seen this movie before; index hugging investment funds are ultimately a commodity that gets killed by passive index funds. Active managers bleed dry unless they can add meaningful value. To justify taking active fees we need to build truly active products, not just charge for access to this nascent asset class. We need to demonstrate that we can bring the best of traditional fund management, risk control and transparency, alongside cutting edge technology and vision.
Transparency, the very cornerstone of the blockchain technology underpinning crypto, should be echoed in our investment philosophies. It's about fostering a culture of honesty and openness, where operational clarity and regular communication with clients is the norm, not the exception. Infusing such transparency into the crypto world could serve to uplift the entire industry.
To avoid endless reruns of the tumult that closed out 2022, a spotlight on compliance and regulation is non-negotiable. The horizon of crypto is radiant with opportunities, yet our navigation through this terrain calls for caution, meticulous oversight, and honesty.