Once dominated by retail investors, crypto sector is now attracting major institutional money

Open this photo in gallery:

Two significant investments in crypto companies by Canada’s largest pension funds are the clearest indicators yet that this country’s institutional money is taking a serious interest in the digital asset world, industry observers say.

In late October, the Ontario Teachers’ Pension Plan participated in a US$420-million funding round of Bahamian-based cryptocurrency trading platform FTX Exchange, its inaugural investment in a crypto company. Just a week earlier, Caisse de dépôt et placement du Québec was part of a US$400-million investment round of Britain-based cryptocurrency lending platform Celsius Network.

“These are two major, major financings by well-known names that have not shown an interest in crypto until now. I was very surprised to see the pension funds get involved,” said Stéphane Ouellette, chief executive officer and co-founder of FRNT Financial, a Canadian crypto derivatives trading platform.

For years, cryptocurrency was dismissed by traditional institutions and investors as an overhyped trend subject to the whims of an unsophisticated retail investor base – and the currency of choice for criminals and money launderers. But bitcoin’s high prices over sustained periods, coupled with significant innovations in blockchain – the underlying technology of cryptocurrency – have piqued the interest of a more seasoned, deep-pocketed class of investors eager to capitalize on this era’s gold rush, even if it means navigating volatility.

“This is different from the 2013 or 2017 crypto bull market. Those were largely retail-driven, but recently we’ve started getting calls from family offices and high-net-worth individuals interested in dipping their toes into the space,” said Rob Furse, co-founder and president of Toronto-based investment bank Echelon Wealth Partners.

These days, Mr. Furse added, the most prominent venture capitalists, hedge funds and wealth managers are focused on figuring out the most lucrative way to “play the space,” given the variety of developments in the sector, ranging from the growth of decentralized finance (DeFi) startups to crypto exchange-traded funds and investing in crypto tokens themselves.

Still, it is hard to quantify exactly how much institutional money – specifically Canadian – is flowing into the crypto sector.

Data provider PitchBook estimates that by mid-2021, global venture capital funds had already poured US$17-billion into crypto companies, an amount almost equivalent to the total raised since 2010. A study of 1,100 institutional investors conducted by Fidelity Digital Assets between December, 2020, and April, 2021, found 52 per cent were already investing in digital assets. In Europe, digital asset portfolio allocation increased from 45 per cent in 2020 to 56 per cent in 2021, while in the United States there was a six-percentage-point jump, to 33 per cent. And at the time of the study, a remarkable 71 per cent of Asian-based investors held some form of exposure to crypto.

CoinGecko, a cryptocurrency data intelligence website, estimates the current market capitalization of cryptocurrencies at US$2.77-trillion; in April, 2020, it was just US$191-billion.

The Canadian Venture Capital Association said it does not track crypto deals, although it has recently started keeping count of the number of companies receiving venture capital funding that are involved in the blockchain and crypto sectors.

“It’s hard to exactly quantify Canadian institutional capital or capital from high-net-worth individuals flowing into the crypto sector,” said Strah Savic, head of data and analytics at FRNT Financial. But metrics such as the number of bitcoin wallets and the growing computer power needed to secure bitcoin networks are good indicators of how widespread crypto adoption has become, he said.

Since January, 2020, for example, the bitcoin network hash rate – a measure of the processing power of the network – has increased 40 per cent. That effectively means more bitcoin miners have entered the network.

Some Canadian investment banks have benefited from the crypto explosion. Toronto-based Canaccord Genuity Corp. has already led eight equity financings for mostly Canadian crypto companies in 2021, totalling $462-million; for all of 2020, it led seven crypto deals, generating $200-million. Mr. Furse of Echelon Wealth said his company, too, was involved in far more crypto-related transactions in 2020 and 2021 than in 2018 and 2019.

For a long time, institutions that were curious about crypto were reluctant to take the plunge into digital assets because of their immense volatility, said Greg Taylor, chief investment officer of Toronto-based wealth manager Purpose Investments. Indeed, the Fidelity Digital Assets study showed concerns about volatility had increased among institutional investors between 2020 and 2021, with 54 per cent saying it was a “significant barrier” to getting involved in the sector.

“But there are various ways to hedge against that volatility now, especially with the emergence of crypto exchange-traded funds,” Mr. Taylor said.

Purpose launched two crypto ETFs – Purpose Bitcoin ETF and Purpose Ether ETF – in February, which gave investors the ability to gain exposure to bitcoin and ether without directly holding the tokens in a digital wallet. But both those ETFs are passively managed, meaning they are still subject to the price movements of bitcoin and ether.

“After we launched those ETFs, we got a ton of global interest from high-end institutions that I can’t name. They were looking for a product that was simple and liquid, where they did not have to go through the process of figuring out how to hold crypto tokens,” Mr. Taylor said.

So the company announced the creation of three actively managed crypto ETFs – Purpose Crypto Opportunities ETF, Purpose Bitcoin Yield ETF and Purpose Ether Yield ETF – that will use a derivatives-based strategy and pay dividends.

Purpose’s crypto ETFs currently have $1.9-billion in assets under management, and Mr. Taylor estimates half that money is institutional.

“It used to be a really small community – you would go to crypto conferences and see the same people,” said Mr. Furse. “Now you’re seeing Andreessen Horowitz launch a US$2.2-billion crypto fund just three years after it launched its first, US$300-million fund,” he continued, referring to the Silicon Valley venture capital giant. “Another way to gauge institutional interest in the sector is if you’re a crypto startup. I would say it has never been easier to raise money.”

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.