I have argued for a long time around here that the biggest problem for most investors who are thinking about buying cryptocurrencies is remembering their passwords.
It is just bafflingly easy to lose crypto, in the simple sense of accidentally misplacing it, whereas it is more or less impossible for a modern institutional investor to misplace stocks or bonds.
Whenever I write this people make fun of me, because (1) it doesn’t seem like it’d be that hard to remember a password? and (2) the people making fun of me tend to be crypto-savvy and unafraid of a little information-security work. But, here, I’m right:
Security concern, more so than the volatility and regulations, is what holds institutional investors back from investing in crypto and digital assets, a survey by Europe’s largest regulated digital-asset hedge fund manager showed.
The survey of institutional investors and wealth managers, who collectively manage around $108.4 billion, showed 79% see asset custody as the key consideration whether to invest in this space.
Custodians provide solutions for investors who want to securely store and protect their crypto assets. The report was commissioned by Nickel Digital Asset Management, and involved interviews with 50 wealth managers and 50 institutional investors across the U.S., the U.K., Germany, France and the United Arab Emirates.
“This was followed by 67% who said price volatility, 56% who cited market cap, and 49% who said the regulatory environment,” the report said. “Further 12% included the carbon footprint from Bitcoin and other cryptocurrencies in their top three reasons for not investing.”
I think there are two important lessons here. One is that there is a large market opportunity for intermediaries who want to provide crypto custody solutions to institutional investors.
Investors want to buy economic exposure to crypto, but they find actual crypto ownership extremely unpleasant. They like that crypto prices go up; they dislike that crypto holdings keep disappearing.
Making crypto ownership more pleasant — by selling institutional investors nice leather-bound notebooks to write their passwords in or whatever, or by offering to custody their crypto for them in your own highly secure leather-bound notebook — seems like it could be lucrative.
But the even more lucrative opportunity is providing roughly-economic-equivalent alternatives to crypto ownership. So you can sell cash-settled Bitcoin futures, or Bitcoin exchange-traded funds, or being a public company that owns a lot of Bitcoins, or volcano bonds, etc.; the point is that if you can go to institutional investors and say “we will give you the economic experience of owning Bitcoin without the headache of actually owning Bitcoin” that is still, in 2022, an attractive proposition.
The other lesson is that if you are a DeFi maximalist who thinks that cryptocurrency and blockchains and decentralized finance will replace the traditional financial system because they are better, because they are more robust and secure and efficient and technologically advanced than the rickety old system of stock ownership, you do have to reckon with the fact that investors basically like the economics of crypto but hate its technology.
I suppose this is good for the value of crypto as an asset class, but doesn’t it seem bad for the value of crypto as a financial system?
NFT Stuff: Olive Garden
We talked last month about a funny non-fungible token project called “Non-fungible Olive Garden,” which let you buy an NFT representing an individual Olive Garden restaurant franchise. The project is not affiliated with Olive Garden, and carries no real-world rights whatsoever. I wrote:
I can say words like “we should put real estate title registries on the blockchain,” but actually doing that requires getting lots of local jurisdictions and courts and banks and mortgage companies and title insurers and real estate agents to coordinate around some particular blockchain solution; it is an enormous social coordination problem and seems exhausting.
But you can sidestep it by just pretending. Instead of digitizing ownership of Olive Garden franchises, with the right to hire and fire employees and collect cash flows and the obligation to maintain food-safety standards and take out the trash, you can digitize pretend Olive Garden franchises, digital receipts associated with pictures of Olive Garden franchises. “They’re in the metaverse!” or whatever. Instead of selling an NFT that conveys ownership of my house, I could sell an NFT “of” my house, which conveys nothing except itself. (Or: Anyone else could sell an NFT of my house.) “If I buy the NFT of your house do I get your house?” No, you get the NFT of my house. “Why would I want that?” I don’t know.
Well. If you sold an NFT of my house, could I … stop you? Could I go to court in the real world and say “stop selling my house in the pretend world”? I don’t know! Presumably your defense would be, like, “selling your house in the pretend world doesn’t affect you at all, so why shouldn’t I be able to do it?” Selling virtual claims on real property seems … just … strange, I don’t know.
On the other hand selling virtual claims on intellectual property seems more obviously actionable. If I make an NFT “of” a painting and sell it on a crypto platform, the actual artist who did the painting seems to have a real complaint that I am violating her copyright.
Perhaps she can’t do much about the immutable code of my NFT on the blockchain, etc., but she can (1) sue me for money in a regular court and/or (2) send legal threats to the main NFT trading platforms asking them to delist my NFTs.
Olive Garden franchises are probably more like intellectual property than a house; anyway I guess Olive Garden’s lawyers asked Non-fungible Olive Gardens to knock it off, on trademark grounds, and got the NFTs delisted from the OpenSea NFT trading platform. Seems right! As a matter of, like, old-school regular-world intellectual-property law. As a matter of code-is-law blockchain stuff, I don’t know.
NFT Stuff: Other
Yesterday in “Things Happen” I included a link to a New York Post story titled “‘90 Day Fiancé’ star retires from selling farts after heart attack scare” because, you know, perfect headline. But what I missed is that after retiring from selling farts in jars, the “90 Day Fiancé” star has moved on to selling, you know what it is, I’m sorry, I’m sorry, but:
She’s still going to sell her farts as non-fungible tokens, more commonly known as NFTs. …
But while Matto has semi-retired from the real-world fart jar business, she’s still pursuing the world of NFTs, where she sells cartoon images of her fart jars. Non-fungible tokens are most often associated with jpeg images, but they’re essentially a decentralized receipt on the blockchain that can be any kind of hyperlink.
I’m truly, truly sorry; nobody wants to be talking about this less than I do but sometimes when you write a financial newsletter you have unpleasant responsibilities.
In general my view is that a non-fungible token “of,” for instance, a painting is much worse than the actual painting, because I’d rather have a painting on my wall than one on the blockchain. But I suppose an NFT fart might be better than an actual one? Like, if you have a negative-utility good, why not sell an NFT of it instead of the thing itself?
Read full story on Bloomberg