Institutional Investment Into Crypto. What's Happening And What's Next?

Updated: Jul 21, 2021

This article was originally published in Blockchain Industry Review - a Crypto Curry Club Magazine published monthly and available in soft copy and the printed version.

An Interview with Featured Contributor, Niclas Sandstrom

CEO and Co-founder of Investment Management, Hilbert Capital

Niclas is the co founder of Hilbert Capital, CEO and a hedge fund manager. He is the holder of a PhD in theoretical physics. He sat at the next desk to his co-founder, Magnus Holm, while studying their PhDs twenty years ago. Niclas, a native Swede, moved to the Netherlands and then London working for major financial institutions. Hilbert Capital is a hedge fund specialising in algorithmic trading of digital assets. He always liked quantitative things and emerging markets. He first became aware of crypto before 2017 but paid it scant attention to it until Magnus properly drew it to his attention. This time the combination of the technology and the fresh appeal of a new relatively unregulated market was an instant hit. He has some great insights into institutional invest into crypto, what's behind it, and what might be next for institutional money with regards to crypto.

“You could use an API to hook up to a crypto exchange and start playing with algorithms straightaway. I was hooked.”

What appeals to you about Crypto Assets?

I think there are two things that jump out at me.

As a trader and hedge fund manager, there is an opportunity to make a lot of money. The combination of high volatility and otherwise immature markets creates many opportunities for investors.

The second attractive element is the technology.

There is a lot of really cool and powerful stuff being built in this space and I think these technologies will lead to the creation of new industries as well as the elimination of others.

Bitcoin is the poster boy for crypto, an example of the revolutionary aspect of decentralisation, without any company behind it. Even more revolutionary, I think, is the emergence of the smart contract which allows for disintermediation of traditional financial services and whole-scale automation of more or less anything that involves a transaction, be that value or data/information.

How do conservative investors react to crypto?

Back in 2017 most conservative investors were certainly not looking at crypto but now many are interested.

From our perspective we try to manage this highly volatile asset in a conservative manner. For example, we don’t use leverage -, we have never deployed leverage in these volatile markets and will not do so until these markets mature. We have robust processes in this space. We put a lot of emphasis on risk management and that is important to our conservative investors. Risk management goes far beyond just market-risk management – the operational risk management is just as important, if not more important.

We know the crypto asset class is crazy – that makes it attractive – but by deploying conservative processes around that we keep everything on an even keel.

Our fund administration is based in the US, so is our banking which is subject to S.E.C regulation. And so we say to our clients- this is where you can get a real boost to your returns by only investing 5% or 10% of your capital in this space depending on your appetite for risk.

Our clients get returns orders of magnitude higher than traditional assets, but they are only risking a small percentage of their overall net worth. People find this appealing

Have you ever felt crypto was a Ponzi scheme?

Never. There are lots of reasons why people might come unstuck when looking at crypto of course– including the issues around private keys; if you lose your private keys, you lose your coins. And during the 2017 ICO craze there were many shady projects using ICOs as pure money grabs, some were just some sketchily written notes in a white paper with no plan or no intention to execute. But because of the powerful technologies and the many serious projects in this space we were always convinced this was going to be the next big thing, despite some of the bad publicity.

For example consider the bad press offered by JP Morgan in 2017, and now that institution is heavily involved in this space and have several of the most well-known crypto companies as their clients.

Who are your clients?

Typically, they are high net worth individuals family offices and institutional investors.

Aside from risk, how else do you provide support?

Our investment process is very transparent, especially since we are algo-trading. We follow regulation closely and try to adopt best practices quickly.We operate using conservative investment policies.

We don’t expose our clients to worries like managing private keys. We handle all the required steps to invest in this space and our clients invest through our vehicles in the same way they would do in another traditional fund. The independent fund administrator handles the KYC/AML onboarding and so on. Our clients don’t necessarily need or want to see the process, they just need to see the outcome of the investment process and the detailed reports which we produce on a monthly basis.

We have no lock-up and a two-month notice period if they want to withdraw some capital. It is important to have a long term perspective when investing in crypto, 3-5 years or beyond. It’s just the same as investing in stocks and shares.

Why is Bitcoin compared to gold?

The reason that gold and Bitcoin are often compared is that both exhibit low correlation to other asset classes – while the returns are expected to be higher for Bitcoin as it is still beginning at a low market cap base.

(Note from editor – low correlation means an assets price action is less likely influenced by the price action in other markets, reducing overall volatility if added to the portfolio).

One example of this is should you have invested in S&P alone over four years you might have returned 68%, but if you mixed it with say 10% Bitcoin, that return would have risen to 150% - with the same volatility as the pure S&P portfolio. Such is the power of a low correlation asset exhibiting high returns.

While we are watching the bull run from the middle of 2020, we believe that there is going to be a strong market for the next 10 years or maybe even longer. At which point, when the crypto market matures and is a comparable size to other traditional assets, we think it will stabilise and act just like other traditional markets.

"The general belief is that crypto will overtake gold within five to ten years which will see the current one trillion- dollar market cap surge to ten trillion."

It’s important to note at the same time that some 95% of all projects in this spacewill fail and go to zero, and right now it is hard to tell which ones will be winners and which ones will fail.

From our perspective we only trade the top segment in terms of liquidity/market-cap, and any failing projects tend to fall in the market cap ladder and will be excluded from our portfolio and more promising projects moves up to take their place.

However, overall, we expect to see crypto as the best performing asset class.

DeFi is of particular interest.

As a technologist and financier, innovation is very exciting to me. Previously we had only big centralised crypto exchanges such as Coinbase and Binance. The issue for decentralised exchanges was a lack of liquidity. Last year Hayden Adams cracked the liquidity nut with UniSwap where a decentralised exchange now delivered deep liquidity depth in many assets at par with that of the biggest centralised exchanges.

Right now, we only look at the bigger platforms, our hurdle for inclusion is a market cap of around $100 million, although some smaller assets may attract our attention..

"This space is fascinating and growing at speed."

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