Kevin O'Leary said, “We’re nowhere in the adoption. The truth is…there’s no institutional capital. We’re nowhere. We’re nothing.” That assessment may seem to contradict the regular drumbeat of news on TradFi firms crossing over into DeFi.
On this weekend’s episode of Empire, Kevin O’Leary (of Shark Tank fame) was asked where we are in the cycle of adoption of crypto as an asset class.
“We’re nowhere in the adoption. The truth is…there’s no institutional capital. We’re nowhere. We’re nothing.”
That assessment may seem to contradict the regular drumbeat of news on TradFi firms crossing over into DeFi.
But these TradFi crossovers are mostly looking to take money out of crypto, not bring new money in: VCs create new coins to sell to retail, hedge funds arbitrage market inefficiencies, and banks facilitate for large investors.
What's not on that list of crossovers is the biggest, most important category from traditional finance: Asset manager.
These are the stock pickers and asset allocators running trillions in actively managed money on behalf of mutual funds, pension funds, family offices, sovereign wealth funds, endowments, etc.
Those types have yet to show up in crypto in any great numbers, which is why O’Leary says “we’re nowhere.”
It's natural, however, that asset managers would be last to arrive.
VCs are seed funding the assets for them to invest in. Hedge funds are creating liquid and efficient markets. And banks are building the infrastructure institutional investors require to feel safe.
We’ll need more of each of those for traditional asset managers to even consider investing in crypto.
But when they do consider it, will they like what they see?
Kevin O'Leary thinks so: “In the next 10, 12 years, crypto will be the 12th sector of the S&P.”
I'm a little more skeptical.
Time to Play Ball?
Traditional asset managers are in the business of investing in productive assets.
That precludes bitcoin and ether, which are stores-of-value — great for macro funds that trade in and out of things like gold, oil futures and Swiss francs, but not a substitute for cash-flow-generating stocks and bonds.
You could argue that the staking yield on ETH is like a dividend, and it sort of is.
But here’s one of my higher conviction assumptions: Asset managers won’t ever take smart contract risk.
Staking ETH entails smart contract risk, which, I think, eliminates ETH from consideration by traditional asset managers.
It also eliminates a lot of the rest of the crypto landscape: The vast majority of protocols that generate “cash” flow do not just return those flows to token holders. They pay them out only to stakers.
So to receive the cash flows they are always targeting, asset managers would have to stake their tokens.
I don’t think asset managers will ever stake tokens.
If they were to stake their tokens, once you get past ETH, the cash flows are a bit suspect, anyway.
Bond investors have a legal claim on cash flows, of course. And equities investors have assurances from management that the raison d’etre of their companies is to return capital to shareholders.
This is not the case in crypto.
With tokens, there are no management teams to ensure that cash flows are returned to shareholders.
If a protocol does make excess returns, they won’t be paid out to token holders unless holders vote to do so.
You might expect they would, but, as evidenced by the unactivated fee switch at Uniswap, it’s not a given: Many crypto investors believe profits should be used only to benefit the protocol, not token holders.
And the SEC likely agrees: A DAO that returns profits to token holders risks being declared an unregistered security.
There are reasonable counter-arguments to that view, but I think it’s safe to assume that large asset managers won’t ever buy something that might turn out to be an unregistered security.
But let’s say the SEC allows it, and token holders vote for it: The cash flows in question may be more of a leaky faucet than a gushing fire hose.
Sustainable cash flows generally come from moats, and crypto does not lend itself to moats.
Crypto is open-source, which means that any protocol earning excess returns is at risk of being forked.
There are no patents or intellectual property in crypto, and there will never be an antitrust case because no one will ever have a monopoly on anything.
Without patents and monopolies, there may not be much rent to extract, which makes crypto less interesting to investors: Asset managers are mostly interested in extracting rents.
Businesses accrue value over time by building patented products and brands, proprietary databases of information and captured bases of customers.
I’m not sure any of that happens in crypto.
BUIDL and They’ll Come?
Kevin O’Leary’s view is that the only thing holding back the institutions is regulatory uncertainty:
“They’re never going to invest in it until we get policy. Until we get regulated. And that’s the whole investment thesis. You’re getting ahead of the institution here.”
The rest of the industry seems to agree: VCs are getting ahead of the institutions by seeding new tokens to sell to them. Hedge funds are joining in ever greater numbers, ready to arb their trades. And banks are getting set up to facilitate their business.
But once institutions do get the regulatory green light, I’m not sure they’ll be hitting the gas pedal very hard.
Which, in my view, would be for the best.
We really have no need for traditional asset managers at the moment. Things are being built plenty fast, and valuations are plenty high without them.
Crypto will create a lot of value for users. But it may not capture much of it for investors.
The DeFi field of dreams should be built for the users who will most certainly come.