I’ve said many times before that cryptos is an asset class that’s originated from the retail world. As such, it has not yet reached full escape velocity when compared to a more traditional asset class, like equities or FX (foreign exchange), which are deeply intertwined in the institutional capital markets world. I’ve further said that cryptos resemble more than one traditional asset class. It has flavors of currency (FX), commodities (gold), equities (securities tokens) and the not yet quantifiable utilities asset class (DeFi). That said, however, the general market structure of cryptos very much resembles that of foreign exchange (FX), especially the larger tokens like BTC and ETH, in the way it’s priced, traded and treated by regulators. Therefore, with my past life in FX market, I’ll look to provide this rationale why Corporate Treasuries’ entry into cryptos is a big deal for the ecosystem.
FX is perhaps the most liquid market in the world. But how did it get that way and who are the underlying players? With talks of HFTs and big bank market makers, many forget that before large scale electronic infrastructures enabled so many players to get involved, most FX flows came from two groups of non-correlated flow providers. They are the Real-Money Funds and Corporate Treasuries. Even today, with its $6T+ daily turnover in the FX world, these two classes of participants drive the primary market flow.
We’ll talk more about Real-Money Funds in a different post. But these are generally asset allocators – your mutual funds (40 Act), pensions, insurance, sovereigns, the non-hedge funds that trade on non-levered “real” money, mostly long-only. They participate in various asset classes and large FX transactions are the residuals of portfolio rebalancing and allocation activities. That’s why State Street, Bank of New York and other custodian banks have transition desks.
Corporate Treasuries, on the other hand, are hopefully easier to understand. These groups hold balance sheet capital within corporations to make operational and strategic financial decision with this capital. On the backs of these decisions, you also get FX transactions as residuals. These are big residuals. Imagine a large U.S. company acquiring a multi-billion dollar European company with cash. Then multiply that by hundreds of deals. Or a multinational company in Asia paying their U.S. subsidiaries and visa versa. Corporate treasury FX flows are happening daily. All these flows, less price-sensitive than capital market players’ flows, are the primary drivers of the FX marketplace. This is considered an “uncorrelated” flow because the timing and direction are not in-line with open market exchange rate movements – these deals have to happen regardless of market conditions.
Now back to cryptos. Without the equivalent corporate treasury and rebalancing flow demands to drive the primary cryptos market, it will always be thought of as speculative. Good thing for us in the cryptos space now is that both allocation and corporate treasury demands are rising. As more corporate treasuries looking at crypto and BTC, we can now have a real pattern. S&PGlobal reports that U.S. corporates outside of the financial sector have a combined $2.5T of cash and investment assets on hand as of Dec 2020. If only 3-5% of corporate treasury balance sheet is moved into crypto, that’s $75-$125B more injected into the market from U.S. companies alone. This is why it’s significant. The effect of this allocation on price movement would be tremendous. This is a real non-speculative investment flow. This is a game-changer in action.
Coupled with the already high level of capital market players from the last few years, we have a real ecosystem in the making. And this is very healthy and supportive of the bigger macro theme. As a company, we’ve seen overall conversation with large institutions in the last 3-4 months steer away from “price-action” to “client demand”. The underlying theme that’s fundamentally different now compared to the 2017/2018 retail bubble is that large institutions and banks are now asking not because of skyrocketing prices (though that does not hurt) only, it’s because their clients are asking. And for large financial institutions, client demand trumps all, even price movement.