TradFi’s View of Crypto in the Post-FTX World

In the wake of crypto winter and the spectacularly public collapse of FTX, CoinDesk wondered how endowments, pension funds, foundations and large family offices – arguably the key to crypto’s future – view the crypto industry. They surveyed 15 such asset owners and asked exactly that.

We may not agree with everything they’re seeing, but perception is the reality we have to operate in. All their points bear consideration, but here are a few of the most important perspectives to take up:

'Crypto and blockchain are here to stay.'

This group's confidence was not shaken by the crypto-related events of the 2022 "pullback" of bitcoin (BTC), ether (ETH), and other coins, the crypto credit crisis or the ensuing contagion. Their reactions to these events ranged from sanguine ("the events of 2022 … do not mean much to me or crypto") to fatalistic ("it [crypto] will bomb a few more times before it becomes institutional before we can trust actors know what they are doing") to gleeful ("I'm all for the crash"), with several others viewed the events as a "necessary capitulation" that would result in a better, healthier ecosystem. More generally, none thought 2022 spelled the death of crypto. On the contrary, they generally agreed with an endowment chief investment officer (CIO) that "crypto and blockchain are here to stay." However, they all agree that for them to commit meaningful capital to crypto, the future of crypto must look much different from the past.

'Cryptocurrencies are a solution in search of a problem.'

The future of crypto will not include investments in cryptocurrency trading strategies, according to the allocators. The managing director at a large family office forcefully pointed out that "we have no interest in crypto as a currency." The head of alternatives at a corporate pension plan added that he viewed crypto trading as "degenerate gambling."

The group also uniformly rejected the usual economic arguments for a core allocation to cryptocurrencies (it's an uncorrelated asset, a store of value, or an inflation hedge). One large endowment characterized these arguments as "hypothetical."

'It's time for crypto to put on big boy pants.'

The future of crypto will be good crypto businesses, not good crypto products.

For these investors, 2022 was a watershed year for crypto. While this group views crypto writ large as a transformative technology that could lead to genuine and much-needed innovation, to date, these investors view the crypto ecosystem as "a giant crypto circle jerk that incentivizes people who contribute very little value creation." An investment consultant described the ecosystem prosaically as a "hobbyist industry consisting of a limited group of technically sophisticated users. … What's hot in crypto is not what institutional investors care about."

…

'We need a generational change for crypto and the underlying technology to be adopted.'

The future is far away. Allocators identified several structural barriers that will impede their deployment of capital, including the difficulty and time it will take to build sustainable, scalable crypto businesses and the opposition of legacy institutions that benefit from centralized structures.

Several also identified a less obvious but more formidable barrier: institutional investors' current worldview. These allocators assert that broad-based crypto investing will require a two-part "generational shift." For decades, TradFi allocators' investment worldview has been circumscribed by the canon codified in CFA and MBA curricula, which, as the CIO of a public pension plan said, "do not support crypto-related investments … If we get rid of these ideas, in five years, we'd have innovation, the innovation we desperately need."