This article originally appeared here in Institutional Investor on September 23, 2019
In December 1999, Amazon.com’s stock reached a tech-bubble peak: At $106.70 per share, the company held a market capitalization of $36 billion, and earned $1.6 billion in revenue for the calendar year. The market believed Amazon and other internet darlings would one day rule the world.
Two years later, the markets felt decidedly different about Amazon.
By then, the stock had dropped 95 percent to a trough of $5.97 per share; its market cap was $1.7 billion. But while the market was giving up on earlier prognostications of a revolution in commerce, the company continued to grow for the future. In 2001, its revenues doubled from two years before to $3.1 billion.
It took nearly a decade for Amazon to regain and hold its prior peak valuation. In 2009, Amazon stock climbed back to 1999 levels, and the company generated $24.5 billion in revenue, or 15 times the revenue it had produced a decade before. Although the market was a decade early, Amazon eventually justified the valuation and changed the course of retailing.
Crypto assets experienced a similar fall from grace in the year and a half or so since I wrote “When Will Yale Buy Bitcoin?”
In December 2017, Bitcoin rose to $17,000. A few months later, Yale entered the space, and crypto bulls touted the news as a tipping point for institutional adoption. The flag wavers were way too early.
The price of Bitcoin fell 85 percent from its high, and institutional curiosity about the emerging ecosystem evaporated. However, after this year’s price recovery, leading institutions started asking questions about the opportunity left for dead by all but the most engaged participants.
While the price of crypto assets has bounced around, technological and infrastructure development has continued apace — akin to the business activity at Amazon after the internet bubble popped. As Michael Novogratz of Galaxy Digital described on a recent Capital Allocators podcast, “Great bubbles happen around great stories. [Crypto] was such a powerful story that it created this global phenomenon . . . . In the sucking in of money you were also sucking in capital and talent and building infrastructure . . . so bubbles have a positive side to them.” According to CoinDesk, venture capital funding for blockchain startups grew six-fold from $500 million in 2016 to north of $3 billion in 2018 — and that money is getting deployed to further develop the thesis behind digital assets and blockchain applications.
Now, institutions are increasingly contemplating how crypto investing might fit into their investment program.
Cambridge Associates released a white paper earlier this year, Cryptoassets: Venture Into the Unknown, suggesting that crypto assets, token investing, and equity investing remain in their infancy and constitute a potentially attractive venture-capital-like opportunity.
The likes of Yale, MIT, and other leading endowments followed this course last year by committing to dedicated venture capital funds sponsored by leading venture capitalists like Andreessen Horowitz and Sequoia Capital-backed Paradigm. For those who took the big plunge, Cambridge estimates that crypto investments currently constitute a whopping 0.2 to 0.3 percent of their portfolios — hardly a potential tipping point.
The state of mind of institutions is not hard to understand. To adopt a new asset class en masse, allocators need to see a sustainable path to return generation. In this case, nascent assets and projects must fit into that mental model. Are they similar to venture-stage equity, where winning businesses will eventually generate substantial cash flow? Are crypto assets commodities, lacking a sustainable yield but potentially serving as a useful hedge against macro scenarios like inflation? Or are they little more than volatile frontier currencies useful only as part of a speculative trading portfolio? A common understanding of the utility of crypto investments in a portfolio is a prerequisite for serious adoption.
Institutions that want to dip their little toe in the water are paying attention to an evolving infrastructure — one that, although under the radar, has been increasingly suitable for investment.
For one, risk managers point to the necessity of mitigating operational risk with institutional-quality trading counterparties, custody, and regulation. At each of these potential roadblocks, slow and steady progress has occurred. On trading, credible market exchanges, including Intercontinental Exchange’s Bakkt and the Chicago Mercantile Exchange, now provide a home for Bitcoin futures, and Novogratz’s Galaxy Digital, popular platform Coinbase, and a host of others are fulfilling the traditional role of banking for crypto assets and blockchain projects.
Custody is another essential crypto building block and is far more complex than custody in traditional markets. Digital asset custodian Anchorage and institutional crypto fund manager BlockTower Capital recently released a white paper that breaks down the current state of custody solutions, some of which appear ready for prime time to serve institutions. (Full disclosure: I am an adviser to BlockTower.) Many have entered the custody fray, from firms like Anchorage all the way to behemoth Fidelity Investments, which launched Fidelity Digital Assets to offer custody and trade execution.
Lastly, and perhaps not surprisingly, the regulatory environment has been slow to develop — although in a few instances, the Securities and Exchange Commission has provided clarity on assets that must be regulated as security offerings (initial coin offerings, or ICOs) and those that need not (Bitcoin and Ether).
We are in the midst of a confusing macroeconomic and geopolitical environment, raising questions about monetary policy, trade wars, reserve currencies, and the yield curve. Traditional ways of thinking about the relationship of markets and fiscal and monetary policy are up in the air, and the role of fiat money is one of them. Crypto assets could play a role in a new world with unprecedented and untested dynamics at play.
It’s still early days for the crypto revolution to take hold, but those paying attention have seen substantial progress. The time may be ripe for early movers to act.
In the ten years since Amazon’s stock returned to its tech-bubble high, it’s risen another 16 times, its market cap has gained 24 times, revenue has jumped 8.6 times, and the company actually rules the world. Buying Amazon stock at $50 per share in 2003 doesn’t look so bad in the rearview mirror. Maybe the Bitcoin equivalent is $10,000 today and the many investment opportunities in the crypto and blockchain space correlated to it will look like a blip in a soaring long-term price chart down the road.
After all, Amazon’s peak price in the bubble wasn’t wrong. It was just a decade early.
Ted Seides is the host of Capital Allocators podcast and is on the advisory board of BlockTower Capital.