Going 90 in a 65

If you’re in crypto you know the catch all phrase “the institutions are coming!!” At this point in time we all have a fairly keen sense that the Nov ‘17-Jan ’18 run up in market cap was driven in large part to the retail investor frenzy, so this article will not address that. What I will attempt to address is “why” I believe there is a considerable amount of attention on the asset class from the investment community and media outlets.

As stated there has been a healthy amount of social media and traditional news coverage of the asset class for the past year — showing interest in what is a relatively new and volatile emerging asset and technology. The attention is all well and good, however I’m drawn to the “why”. Why, when the asset class has capitulated down from ~$1T in market cap to $230B today would Goldman, Fidelity, Nomura, Morgan Stanley, BlackRock and other massive institutions be reviewing and creating solutions to enter the market? Why would EOS and Telegram be able to raise billions of dollars from investors, retail and “institutional”? And is all this attention coming too fast and too early?

From Solume.io

Too much attention too early?

There are a few possible reasons the crypto markets have garnered so much attention (and in opinion too early on) from both from the investment community and media. The first potential reason has been the the lack of yield from traditional fixed income markets for the past 10 years after several bouts of QE. The second potential reason is the overvaluation of the public equity markets. Take a second and do a Google search: “search for yield” and you’ll see where I’m going with this:

QE killed the radio star?

As Garth Friesen wrote about the increase in supply of risk-free assets, he noted: “Global central banks rescued the financial markets through quantitative easing (“QE”) after the 2008 housing market crisis by purchasing a massive amount of government securities. Now that QE is reversing, the market needs to find new buyers for all the bonds. The new buyers are more price-sensitive than the Fed and are not so enthusiastic to purchase bonds with low or even negative real (inflation-adjusted) yields. Also, the amount of government supply is increasing. Thanks to tax cuts and other spending measures, the fiscal deficit is expected to top $1 trillion in 2019. The additional issuance will add fuel to the supply/demand imbalance.

Bloomberg screenshot via Seeking Alpha

As of July 2018 The yield on the 3-month US Treasury bill was pushing above 2% for the first time since 2008. The yield had briefly dipped below zero as recently as late 2015.

Equity Market overvaluation

The second potential reason for the fervor and attention is overvaluation of the equity markets. Research from Boston Consulting Group confirms this: “Over a two-week period during late October and early November 2017, BCG surveyed 250 investors who oversee approximately $500 billion in assets, soliciting their outlook on and expectations for the global macroeconomic environment, equity markets, and the continued ability of companies they invest in or follow to create value. Almost three-quarters of the survey respondents were portfolio managers; 63% focused on the US, while most of the others invested globally.

Overall, 68% of respondents think the market is overvalued — by an average of 15 percentage points. (See Exhibit 1.) This is more than double the 29% of investors in last year’s survey who thought the market was overvalued. Among self-described bears in the 2017 survey, 79% cited market overvaluation as the reason for their pessimism. Overall, more than a third of investors (34%) are bearish about the market’s potential for the next three years, more than doubling the 2016 survey’s percentage of self-described bears (16%).

The incessant buying has pushed valuations to levels that are not only stretched, but stretched to a historic extent. As was recently noted by LPL Financial, the relative strength index, an indicator of technical momentum, is at its highest level since 1995, which indicates the S&P 500 is at its most overbought level in 22 years.

Conclusion

Investors have been searching for yield for years after the Great Recession and traditional asset classes such as fixed income have run dry at investment houses such as Deutsche Bank:

As Matt Turner alluded to in an article from 2016: “fixed-income businesses across Wall Street are in dire straits. Revenues are down and investment banks are cutting staff.”

As the FT reported in Jan 2018: “Fourth-quarter results reported by US banks in recent days show the continued strain investment banks are under, particularly in the fixed income divisions of their trading businesses.”

Yield has been compressed, revenues ascertained from trading have been severely hampered. Quite possibly the institutions and investors need a “hero”

We see the same problems arising from the equity markets as well — with the majority of significant asset managers viewing the current state as overvalued. I think we have a two-fold problem: lack of yielding instruments and too much capital chasing whatever yield is actually available.

According to PitchBook, well over $1,000,000,000,000 in committed capital sits in the coffers of private equity and venture capital funds worldwide. To be precise, as of the end of June 2017, nearly $1.107 trillion in commitments were available for drawdown by fund managers — $145.4 billion allotted to VC, $961.5 billion to PE; these are unprecedented sums.

But are cryptoassets that “hero”? To add some levity, one could argue it’s like asking a puppy to save the world from an alien invasion — sure, totally possible but from a probabilistic standpoint — unlikely and unfair for said puppy. But like that puppy, cryptoassets are relatively new to this world, they need to find their way, needing guidance and structure. We see that now in real-time, with many in the community focusing on scaling, governance, custody…the list goes on. Real solutions for real world implications of the technology. The asset class needs time to mature and can’t be asked to be the magic pill that fixes all the problems that led up to, and consequently followed, the Great Recession.