Digital Assets Digest – October 2022

Welcome to the third installment of the Monthly Digital Assets Digest powered by Venn by Two Sigma – your guide to the state of capital allocation in crypto.

In this newsletter, we dive into the latest developments impacting advisors, asset owners and managers to help institutional investors allocate capital to digital assets with confidence.

It may only be Fall, but constant talk about the crypto winter has us getting out our sweaters a bit earlier this year. What should allocators make of the recent market turmoil? Here are the must-read headlines we’re tracking:

1.The Crypto Story: Where it Came From, What it All Means and Why it Still Matters

Read the just released cover-to-cover issue of Bloomberg Businessweek by Matt Levine for his take on what crypto is, means, and where it might lead.

2. High-Frequency Crypto Trader Says Institutions Are Taking Over

Institutional investors are playing a more-influential role in crypto markets as retail traders retreat, and that explains much of the recent range-bound price action, according to Michael Safai of proprietary trading firm Dexterity Capital. Safai recently joined Bloomberg’s What Goes Up podcast to discuss the state of the digital-asset market and how high-frequency crypto trading strategies differ from the famous “Flash Boys” of the stock market.

3. Wall Street is Warming Up to Crypto

The lack of infrastructure for large institutions compared to what exists in the traditional, regulated capital markets has been a factor holding institutional investors back from investing in crypto. However, that’s changing – one area that’s being built out is crypto trading as a service. The latest sign of this maturation is EDX Markets, a new exchange for digital assets that’s being developed by leading Wall Street players.

4. Fixed-Income Hungry Institutions’ Next Play Is Likely Ether

In addition to eliminating all but a fraction of the blockchain’s energy consumption, the Ethereum Merge to a proof-of-stake system allows token holders to earn additional tokens by participating in blockchain validation — resembling stable fixed-income routines that have long been a hallmark diversifier against the volatility of stocks and commodities.

5. Crypto Is at an Inflection Point. What Needs to Happen to Draw Institutional Investors In

In an op-ed for Barron’s, Franz Bergmueller, CEO of SEBA Bank, argues that digital assets are at an inflection point as institutional engagement with the asset class is reaching unprecedented levels. While demand is here, led by a new understanding that this is a volatile asset class, Bergmueller argues the industry needs to address a number of key concerns in order to enable institutional investors to operate with confidence in the sector and unlock the next phase of growth.

The latest on major financial institutions navigating crypto:

1. What BNY Mellon’s Digital Asset Custody Launch Means for the Crypto Market

BNY Mellon, the world’s largest custodial bank by assets, recently announced that it is officially holding crypto assets in its custody for institutions. Institutional customers at BNY Mellon will now have the ability to use one custody platform for both its traditional and crypto holdings.

2. Gemini To Expand Institutional Reach via Partnership With Betterment

Digital assets exchange and custodian Gemini has struck a deal with quantitative financial adviser Betterment in an effort to capture a slice of the growing number of crypto-minded institutions that are, in turn, going after retail traders apace. Betterment is set to offer crypto portfolios to clients starting next month constructed from digital assets listed on Gemini.

3. Visa Partners With FTX in a Bet That Shoppers Still Want to Spend Cryptocurrencies in a Bear Market

The payments giant is teaming up with global exchange FTX to offer debit cards in 40 countries with a focus on Latin America, Asia and Europe. The cards, which are already available in the U.S., will link directly to a user’s FTX cryptocurrency investing account. The move allows customers to spend digital currencies without moving those off an exchange.

4. NYDIG Raises $720M for Institutional Bitcoin Fund

Despite bearish macro trends, investment management firm NYDIG says it has raised nearly $720 million for its Institutional Bitcoin Fund. NYDIG saw a “flight to quality” from institutional types last quarter, doubling its bitcoin balances year-on-year while shopping its new fund. NYDIG’s latest fundraising efforts come amid a reshuffling of senior leadership. On Monday, the group announced the departure of CEO Robert Gutmann and President Yan Zhao.

5. Grayscale Sets Up Entity to Invest in Bitcoin Mining Hardware

Grayscale Investments, the largest crypto asset manager, is shifting strategy during the midst of the market downturn by setting up an entity seeking to buy Bitcoin mining equipment at distressed prices. The New York-based firm will form Grayscale Digital Infrastructure Opportunities LLC (GDIO), which will be available to accredited investors such as hedge funds and family offices at a minimum investment of $25,000.

In case you missed it, here’s what we’ve been up to:

In the latest post for the VennSights blog, we take a closer look at the relationship between bitcoin and equities – and the data might be surprising. Using Venn analysis, we find that over recent 6-month periods as much as 64.5% of bitcoin’s risk can be explained by our Equity Factor, prompting reconsideration of bitcoin’s role as an alternative.

On the heels of announcing Coin Metrics’ digital assets reference rate data would be integrated into the Venn platform, our CEO Marco Della Torre spoke with RIA Intel about the news and the possibilities that institutional-grade analytics present for advisors seeking to contextualize crypto in a multi-asset portfolio. Read the full article here.

For more insights on how to take a quantitative approach to multi-asset portfolio risk and decision making, visit our blog at VennSights.

IMPORTANT DISCLOSURES

This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Any statements regarding planned or future development efforts for our existing or new products or services are not intended to be a promise or guarantee of future availability of products, services, or features.  Such statements merely reflect our current plans.  They are not intended to indicate when or how particular features will be offered or at what price.  These planned or future development efforts may change without notice. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. See the end of the document for other important disclaimers and disclosures. Click here for other important disclaimers and disclosures.