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Motus Outlook Series | The Changing Institutional Landscape

Capital allocation within crypto is about to change, and the consequences are underappreciated.


The current institutional landscape is distorted by a preference for traditional access points to crypto and a hesitation to own liquid tokens. As ETFs win approval and regulatory progress continues, capital will refocus on liquid hedge funds and ETFs at the expense of VC. Further, hedge funds will be forced to pursue alpha down in market cap as ETF offerings broaden.


This suggests a tailwind for liquid tokens generally, and particularly for overlooked smaller-cap tokens, which in recent history have been both capital-starved and the best performers.


Current Institutional Allocation


Most institutional investors believe there are at least some good investment opportunities in crypto. A majority also cite hesitation to own tokens, mostly related to regulatory uncertainty and the operational challenges of custody. Additionally, daily price volatility of tokens that trade 24/7/365 can be masked by investment vehicles with longer lockups and less frequent marks. This has steered institutional investors to participate in crypto via familiar access points like venture capital funds or imperfect exchange-traded products.


The AUM distribution is surprising:

Source: Galaxy VisionTrack


VC enjoys a simplicity moat around institutional private investments, which has sent an outsized proportion of AUM to venture funding. Passive/beta strategies—despite their AUM being primarily in flawed ETPs—also have a simplicity moat, which has sent a large portion of AUM to the largest, most liquid tokens. Turning to crypto hedge funds, the investment universe is again limited, mostly by liquidity. According to Galaxy VisionTrack, the top 20 crypto hedge funds have 75% of HF AUM, and “…aim to generate alpha opportunities most commonly among the top 10 to 25 cryptocurrencies by market capitalization.”


In total, there is an abundance of capital for the very bottom and very top of the token universe, and unlike in traditional markets, where private equity and small-cap managers fill in the middle, in crypto there is simply a void, particularly when retail is quiet.

Sources in order: Bridgewater Associates, Ibid, Fidelity, Natixis, Cointelegraph, Galaxy VisionTrack, McKinsey & International Monetary Fund, Galaxy VisionTrack, TrackInsight, ETF Database & CoinGecko


The Return Landscape


The allocation setup is at least partly reflected in returns. Where capital is scarce, returns are abundant, and where capital is abundant, returns are scarce. Of course, this is all relative, and the asset class is young, so VC and large cap returns can be excellent. But unlike in traditional markets, VC’s aren’t cornering the market on outsized returns. See below for how some of the more famous VC tokens have performed AFTER their TGEs (or token generation events, upon which VCs at least theoretically have liquidity to exit).

Source: CoinGecko, ICODrops as of 27 March 2023


Further, once tokens are large and liquid enough for ETPs and large HFs, there is often less value to unlock, as those markets are simply more efficient and crowded. Incumbent top tokens necessarily underperform those that supplant them, but combined with knowledge that turnover is extreme and technology is evolving rapidly, managers who can navigate the liquid token universe outside of existing top tokens have the most upside.

*Ex-BTC/ETH/Stablecoins. Sources: TheTie.io, CCi30.com


The greatest returns in crypto have been in liquid tokens on route to large cap status, and rarely did being a venture investor matter. And unlike venture investors, liquid token investors can cut losses, concentrate their portfolios, and hold winning investments for longer. Allocators should preference this, but they currently don’t.


Game Changers and What Comes Next


The last few months saw highly consequential developments for the aforementioned constraints. First, in the SEC vs. Ripple case, a U.S. district judge implied that many tokens are not securities. Second, a slew of the largest asset managers in the world filed or re-filed spot crypto ETFs.


The most important consequence of the Ripple case is a blow to regulation by enforcement. It is far from decisive that tokens aren’t securities, but for the 87% of fund managers who have concerns about unregistered securities, the mood has somewhat improved. The case also implies ETF providers will have an expanded universe of tokens from which to issue new products.


In time, this combines to free institutional investors from having to focus on VC and flawed ETPs as access points. Capital will flow accordingly, with HFs and ETFs as the biggest winners. As a second order effect, large HFs won’t be able to charge for providing beta to large cap tokens, for which ETFs will soon suffice, and HFs will either venture down in market cap or potentially play a more prominent role in growth equity/private equity to alleviate the glut of VC investments seeking exit liquidity.


This is a likely tailwind for liquid token prices, but it is also good for crypto maturation. More professional investors interested in tokens outside the top 25 should improve overall liquidity and efficiency, and at least theoretically the higher dispersion will help expose weaker projects.


While timing is uncertain, the institutional investment landscape has been distorted, and the forces behind that are weakening. Accordingly, money is set to flow very differently than it has in the past, and this ought to inform allocation decisions for everyone.



Sincerely,

Team Motus




Past performance is not indicative of future results. This communication does not constitute an offer to sell or solicitation of an offer to buy the Interests in any jurisdiction where, or to any person to whom, it is unlawful to make such offer or solicitation in such jurisdiction. This communication is being provided solely as a high-level overview and is not intended to be relied on for the terms of any offering. Motus Capital Management has or may hold a financial interest in the assets mentioned. Full disclosures can be found here.

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