The report was published on October 31 and acts as an update to ‘Bitcoin Decrypted: A Brief Teach-in and Implications’ – a previous report issued in December 2017. The update covers Morgan Stanley’s analysis of Bitcoin over the course of the past six months.
The report describes what it terms a ‘rapidly morphing thesis’ with regard to Bitcoin. Essentially, it articulates what it believes to be the defining characteristics of the cryptocurrency over time which breaks down as follows;
2009-2016: Digital Cash – Untraceable But Full Confidence.
2010-2017: Incumbent Financial System Antidote.
2010-2017: Replacement Payment System.
2015-2018: New Fundraising And Capital Allowance Mechanisms
2017-2018: Store Of Value
2018: Disruption Advantaged Refuge For Depreciating Currency
2017-Present: New Institutional Investment Class
This seems to tie in with matters The Bitcoin Mag has reported on in recent months – demonstrating a sustained pace of investment in the crypto space in terms of building out the ecosystem required to facilitate institutional investment. In backing up it’s theory, the report cites investments by Fidelity Digital Asset Services, Bain Capital, Genesis Trading, Goldman Sachs, Galaxy Digital and Vertex.
Morgan Stanley also consider the current barriers to entry for institutional investors considering entering the cryptocurrency space. It identifies underdeveloped regulation as an issue which prevents asset managers from taking the decision to invest due to the reputational risk.
A lack of custodian solutions is another factor that is holding up investment. The recent announcement by Goldman Sachs and Galaxy Digital with regard to investment in custodian solutions provider, Bitgo and similar such recent announcements are likely to result in the building out of the ecosystem further. That should result in greater institutional investment still.
There’s a lack of large financial institutions and asset managers currently invested in the space when contrasted proportionately with the conventional market. Institutional investment centers first and foremost around risk and asset managers are likely to be conservative in their investment choices. Again, as institutional investment grows in the sector, there’s a likelihood of ever increased levels of investment as others follow.
The report identifies that institutional investment has grown from $1.9 billion at the start of 2016 to $7.11 billion by July 2018. The number of cryptocurrency based funds have grown from 31 in 2014 to 220 in the current year. Investment breaks down pretty evenly between hedge funds and venture capital, with 3% private equity. Half of that investment is estimated to originate in the U.S. with 9% from China/Hong Kong and 6% from the U.K.
The Bitcoin/cryptocurrency phenomenon is interesting in that it’s probably the first time that a financial market has emerged without the involvement of the established institutional money from the outset. It bootstrapped it’s way up in the early days purely through investment at the retail level. Whilst institutional investment continues to grow, Morgan Stanley identify that retail investment has stagnated stating that “retail investors stay put”.
The report also covers other aspects of Bitcoin and cryptocurrency. As far as privacy is concerned, the report identifies the widespread belief in it’s anonymity in the earlier years but that by 2016, it became pretty clear to most that a permanent record of transaction eliminates any tangible anonymity. It states that the response to this has been the emergence of privacy based projects such as Monero, Zcash and Bitcoin Private.
In terms of adoption amongst the top 500 eCommerce merchants, there has been virtually no acceptance of cryptocurrency by U.S. eCommerce merchants.
Morgan Stanley’s report clearly validates a trend that has been emerging in the cryptocurrency space in recent months. The sector has seen increased institutional investment – together with moves to build out the ecosystem which will facilitate more investment in the near future. It seems reasonable that this is reflected in their conclusion that crypto is now a fully fledged institutional asset class.