“That’s Our Two Satoshis” - For Real, Institutions are Actually Coming to Crypto

What happened this week in the Crypto markets?

Throughout our 5+ years writing weekly updates on the digital assets market, we’ve historically written more about specific sectors, themes, and assets than we have about broader macro developments.  We still mostly focus on this, but over the last 18 months, it has become more challenging as the growth and innovation in this industry has largely been stifled and the regulatory environment has become front and center.  What has been interesting to watch is how “experts” in this space (including ourselves at times) have been forced to evolve their commentary.  From tech to macro to regulation, many have not skipped a beat with their opinions.  But when it comes to Binance, it has always been a slippery slope, largely due to just how big and important Binance is to the ecosystem. Pre-FTX’s implosion, most commentators stayed silent regarding Binance, similar to how most digital asset investors never talked about CPI reports or weekly jobless claims prior to 2022.  But that has really changed in the past six months.  Many people burned by FTX have now become outspoken public critics of Binance, while those who have always been skeptical have become louder due to less backlash, and many more have simply jumped on every media headline with a comment of their own. The reason this fascinates me is that Binance continues to be incredibly opaque.  Few people, if any, have real insights into how Binance operates, yet all of a sudden, the confidence level from outsiders sharing their opinions has accelerated. It seems there is a headline involving Binance every day. This negative sentiment was further fueled last week when it was reported that several senior Binance executives resigned, including some members of their legal and compliance teams. Binance's market share has fallen to 70% of centralized exchange volume, down from 85% pre-FTX’s downfall, with OKX capturing the majority of that lost market share (now at 20% market share). While this is a large decline, 70% is still 70%, meaning they still dominate trading in this industry.  It seems hard to believe that Binance is going anywhere other than to find their checkbook to pay an upcoming fine. 

When we have opinions, we share them.  We have not been shy about sharing our discomforts over the years with BlockFi, Grayscale, Celsius, FTX, Gnosis and many more.  But with Binance, we just don’t have much of an opinion about what is happening 7,000 miles away from us.  It’s more amazing to me that so many others (think they) do.

I have the utmost respect for Larry Fink and Blackrock. It seems hard not to if you invest in any capacity, and/or have worked in the financial industry.  And there is no debate that Blackrock’s recent foray into digital assets, specifically via a Bitcoin ETF filing, has fueled a resurgence in digital assets interest.  So when Larry Fink speaks, it’s usually worth listening. Speaking to Fox Business last week, Fink spoke at length about iShares’ application for a spot-based Bitcoin ETF and the future of blockchain investments.  It’s worth a listen… I guess.  But honestly, it was pretty uninsightful.  Fink fumbles between the term “crypto” and “bitcoin” multiple times, often conflating tokenized assets, Bitcoin, and other more equity and utility-like assets (read how Arca defines categories of tokens), which are all very different.  Noelle Acheson agrees, with an even more in-depth breakdown of Fink’s misfires. 

This is to be expected. The CEO of a $100 billion company, which oversees $9 trillion in assets, isn’t expected to be an expert on all things blockchain.  But while the media and investors focus on Blackrock’s actions and Fink’s words on the surface, a quiet, perhaps more important shift from the traditional finance world is happening beneath implying firms are simply getting smarter. 

A few weeks ago, Bank of America released a 100-page primer on tokenization, which is the best research writeup on the future of tokenized assets that I've ever seen from a TradFi shop.  It was incredibly insightful, and loaded with supporting data.  TradFi firms aren't just filing for ETFs and providing sound bites on Fox and CNBC- TradFi research is actually getting their hands dirty.  While few sit down and read 100-page primers, Wall Street only produces these documents when there is demand, and feel the need to have a reference document out there for clients.  I remember reading Merrill Lynch’s 2-part 300-page primer on credit default swaps in 2006, long before the majority of investors knew how to price or trade these instruments.  It is a big step in the right direction.

 

Now, this may seem unimportant. It’s just one report, and after all, some large TradFi firms like Fidelity have been writing in-depth research on Bitcoin and blockchain for years, and have consistently shown a high aptitude for complex topics.  But it’s also important to note  just how awful TradFi’s coverage of digital assets has been over the past five years before you can truly appreciate how good this BofA report really is.  For example, in early 2019, some of the comments about Bitcoin and blockchain from traditional asset managers included:

This was the consensus view at the time. And over the next several years, what little research written from TradFi firms about blockchain has largely been 2nd grade level information.  It focused solely on the few publicly traded vehicles (BTC mining stocks, COIN) that Wall Street brokers and bankers could traffic in or jas made outlandish BTC price predictions with no data to support. It is almost never differentiated or even touched upon the different types of tokens that exist.  

Today, the majority of the world's largest mutual fund groups have launched crypto products, and top bulge bracket financial firms are writing in-depth reports on the industry.  It's only a matter of time before everyone else realizes that you either launch your own crypto products or force customers to buy them elsewhere.

Closing the loop – maybe 70% market share from Binance really doesn’t matter.  Remember Netscape, Firefox, and Internet Explorer?  I barely did either until I saw this great visualization of how Chrome and Safari now dominate the internet browser market after a 25-year back and forth.  Chrome = Google.  Safari = Apple.  

 

Early incumbents got replaced eventually by the companies with the most customers.  And who has more investing customers than Blackrock, Citadel, Schwab, Fidelity and Franklin Templeton? 

Seems pretty clear where we’re soon headed.