In a sign of how much the crypto market has evolved from 2013 — when Genesis Trading launched the first over-the-counter bitcoin trading desk in the US — Michael Moro said he once had a high-net-worth investor showing up with a suitcase full of cash to buy the nascent digital currency.
Moro, the chief executive of Genesis Trading, recalled that the customer in question would not identify himself but instead proceeded to open up his cash-filled suitcase to prove that he could afford to pay.
"Obviously, we had to escort the gentlemen off our premises," Moro said in a recent interview. "But that's symbolic of what the crypto environment was back in the early days."
Nowadays, no one is attempting to buy cryptocurrencies with stacks of $100 bills. And Genesis is not only trading with some of the largest institutional investors around the world but also a formidable force in crypto lending, custody, and prime brokerage.
During the third quarter, the firm's lending desk handled $35.7 billion in new loan originations, up over 586% year-on-year and 40% versus the second quarter. Its spot and derivatives trading business also surged 450% and 12 times, respectively, year-over-year. Through the first nine months of the year, Genesis completed nearly $200 billion in crypto transactions, according to the firm's latest quarterly report.
Building a one-stop crypto shop that mirrors a traditional Wall Street firm is a mammoth undertaking. On the one hand, Moro and his team were considered the "suits" in the eyes of the early Libertarian bitcoin adopters. On the other hand, the traditional finance industry wanted nothing to do with a cryptocurrency that was once associated with drugs, scams, and ransomware.
"It took us a long time to build the trust necessary within the early bitcoin community," he said. "We know that we are not the bad guys, that we are not their enemy, and that we want to help make bitcoin succeed and become a bigger and more valuable asset class."
As bitcoin's price went from $13 at the beginning of 2013 to $64,327 as of November 2021, Genesis' trading business also exploded from making $5 million to $10 million in trades per month to doing $25 billion to $30 billion monthly trades, according to Moro.
How institutional investors are approaching altcoins
Since MicroStrategy started adding bitcoin to its balance sheet last year, the narrative around the potential massive institutional adoption of crypto has been building momentum. Star investor Cathie Wood has set a $500,000 long-term bitcoin price target based on the scenario where all institutional asset managers allocate upwards of 5% of their portfolios to the cryptocurrency.
However, the institutionalization of bitcoin seems to have made it less popular among retail and some institutional investors. Genesis' third-quarter report noted that bitcoin demand continues to trend downwards due to a significant decline in BTC- denominated trading opportunities.
Meanwhile, investor appetite shifted to altcoins, especially layer-one protocols including Solana (SOL), Terra (LUNA), Avalanche (AVAX), and Fantom (FTM), the report said.
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But are institutional investors really diving into altcoins? Moro said it is important to separate them into two groups — the old-guard investors with billions of dollars in assets under management, and the crypto-native hedge funds that have grown to millions or billions in size.
"The truth is the old-money investors are not touching the dogecoins or the shiba inu coins," he explained. "For them, even the approval process internally to get involved in bitcoin is a long-term thing with a buy-and-hold conviction aspect necessary to get these coins through their investment committee."
Conversely, crypto-native players are able to trade based on momentum and sentiment, he observed.
"The crypto guys are able to kind of time their entries and exits and feel like they can take a certain level of risk," he said. "The traditional fund guys have a very difficult time operating on such a short time horizon."
2 emerging trends on his radar
The rise of blockchain-based play-to-earn games has caught the attention of many crypto investors and Moro is no exception. However, he is contemplating how the so-called GameFi sector can disrupt companies that ushered in the gig economy.
He recalled a recent encounter with some play-to-earn game content creators, who viewed their job as trying to disrupt companies like Uber. They explained that someday players could potentially export more value out of earning tokens and rewards in a game than doing Uber rides, which would massively expand the category's total addressable market.
While such disruptions certainly have real-world implications given the already severe labor shortage in the economy, the potential growth of these crypto gaming businesses is a trend worth watching, Moro said.
Another trend he's monitoring is the maturation of institutional bitcoin services and products.
He noted that some banks are starting to trade bitcoin like a currency through their foreign exchange desks, while others are trying to figure out how to lend against bitcoin or lend dollars with bitcoin as the collateral.
"I think you will see bitcoin-backed lending really be a thing in 2022," he said. "Bitcoin is a fantastic asset. It is way more liquid and way better than a lot of the other assets that they are already lending against."
Aside from trading and lending, Moro is also expecting to see more bitcoin-based structured products. Traditionally, structured products provide investors with the potential to earn returns that are tied to the performance of an index or basket of securities. In the case of bitcoin, they can protect against the token's extraordinary volatility.
For example, an ultra-high-net-worth client at a private bank can ask for a structured product that generates a 20% return per year with a 30% downside protection. If the price of bitcoin falls 30%, the client will not lose any of their principal dollars. However, if bitcoin surges more than 30%, their return is capped at 20%.
"You see products like this in other markets and I think you will start to see a lot of bitcoin-based structured products that come to market certainly in 2022," he said.
