Bitcoin for Institutions: Meet the Entrepreneurs Leading the Way

Institutional Adoption of Bitcoin: A Growing Trend

A common perception portrays the cryptocurrency sector as dominated by unconventional technologists. However, a significant number of ambitious fintech entrepreneurs are actively investing in the widespread acceptance of bitcoin by established institutions.

Venture Capital and the Chicago DeFi Alliance

Soona Amhaz, a Lebanese-American venture capitalist with Volt Capital, recently recognized by Forbes as a prominent figure in Silicon Valley, exemplifies this trend. Her initial discovery of bitcoin occurred through Reddit while studying engineering at the University of Michigan. Currently, her firm has invested in 11 crypto startups and collaborates with institutional entities such as TD Ameritrade, Cumberland, and CMT Digital as part of the Chicago DeFi Alliance (CDA).

Amhaz stated that institutions are now focused on supporting promising founders in the space early on. They aim to function as market makers for numerous crypto projects and facilitate integrations and partnerships between decentralized finance (DeFi) projects and traditional financial institutions. She believes that astute investors are proactively positioning themselves for future developments.

The Expanding Definition of DeFi

Amhaz clarified that “DeFi” encompasses not only bitcoin but also the diverse range of blockchain-based systems that gained traction among traders during the pandemic.

She highlighted that specific DeFi projects attracting increasing attention include automated market makers (AMMs), stablecoins, and platforms for decentralized exchange (DEX) aggregation, lending, and derivatives. These recent projects provide additional methods for utilizing bitcoin as a productive asset, extending beyond its role as a mere store of value.

Indirect Exposure and Institutional Products

Historically, institutions have generally favored indirect exposure to cryptocurrency. Juthica Chou, a former Goldman Sachs employee and co-founder of the derivatives exchange LedgerX in 2013, was instrumental in establishing physically settled bitcoin futures, now standard offerings at firms like Bakkt and CME Group. These futures contracts and bitcoin options allow institutions to speculate on bitcoin’s price without directly holding the asset. A cash-settled product provides payment in traditional currency, such as receiving $10,000 upon the expiration of a $10,000 buy option, rather than in bitcoin. There are reports that the asset management firm BlackRock is preparing to offer bitcoin futures products.

Many institutions are currently willing to accept reduced profits in exchange for a lower risk profile. Grayscale’s Bitcoin Trust (GBTC), a popular institutional product, reportedly attracted $1.2 billion in new investment in January 2021.

The Future of Derivatives and ETFs

Chou remains optimistic about the potential of options and derivatives, noting sufficient institutional demand for trust shares like GBTC, bitcoin options, and prospective exchange-traded funds (ETFs) to generate significant returns in 2021.

She emphasized the substantial improvements in infrastructure compared to 2013, including enhanced security measures, auditing processes, and banking infrastructure. The current environment represents a significant advancement over the conditions of the past.

Addressing Premiums and Launching New Funds

The high demand for GBTC shares, offering lower risk than direct bitcoin custody, has resulted in sky-high premiums, sometimes exceeding 100% above the price of directly purchasing cryptocurrency. This prompted Leah Wald, CEO of Valkyrie, to establish her asset management firm in Texas in 2020. According to Crunchbase, she was among approximately 800 women founders who secured funding last year.

Wald acknowledged the challenges of fundraising during the pandemic and the importance of building trust through personal interactions. By January 2021, her startup had secured an undisclosed seed round from angel investors, including Coinbase alum Charlie Lee, and submitted an application to the Securities and Exchange Commission for a bitcoin ETF.

ETF Proposals and Regulatory Considerations

Numerous ETF proposals have been previously rejected, beginning with a submission by Tyler and Cameron Winklevoss in 2013. However, Wald believes the current timing is more favorable for ETF approval. She explained that the various products – futures, options, trust shares, and ETFs – offer different regulatory frameworks allowing for faster redemption or trading compared to direct ownership of bitcoin. Institutions generally prefer indirect exposure to these emerging and potentially profitable crypto markets.

Wald suggests that bitcoin’s increasing market capitalization may have reached a critical threshold in the eyes of regulators. She believes that previous concerns regarding custodial solutions and security are being addressed with improved institutional-grade options.

Valkyrie’s bitcoin trust shares and prospective ETF are designed to minimize volatility and premiums. Wald stated their goal is to create a more transparent product that trades closer to the net asset value (NAV), providing everyday investors with accessible bitcoin exposure.

Growing Female Participation in the Crypto Space

The increasing involvement of women entrepreneurs in cryptocurrency extends beyond American tech hubs. Toya Zhang, head of marketing at the Hong Kong-based crypto and futures exchange AAX, reports that women comprise 25% of her platform’s users and a third of its top users.

Zhang noted that Russia is their largest market, followed by Hong Kong, Korea, Indonesia, and India. She observed that Asian women are often responsible for managing household finances, and women constitute a majority of stock investment user groups in China and Hong Kong.

Diversity and Gender Disparity

The crypto landscape is rapidly becoming more diverse compared to other financial sectors. At India’s Coinswitch.co exchange, women account for 50% of approximately 25,000 users, depending on the region. A survey by the crypto exchange Gemini indicates that women represent at least 40% of British cryptocurrency users.

This disparity may be linked to wealth distribution rather than a lack of interest. In 2018, the World Bank estimated that women held only 38% of global capital wealth. Furthermore, Crunchbase data from 2009-2019 revealed that women founded less than 20% of the 15,379 companies that raised capital.

Innovation Led by Women Executives

Beyond startups, companies like the New York Digital Investments Group (NYDIG) are seeing women executives leading innovation in established brokerage models.

In December 2020, Massachusetts Mutual Life Insurance Co. invested $100 million in bitcoin and acquired NYDIG equity, signaling a positive outlook on institutional demand for bitcoin exposure in 2021. Subsequently, on February 8, 2021, Tesla, Elon Musk’s publicly traded car company, validated this thesis by purchasing $1.5 billion worth of bitcoin.

NYDIG’s Growth and Focus on Bitcoin

Yan Zhao, president of NYDIG, expressed excitement about the growing acceptance of bitcoin by traditional investors. She stated that her firm will empower banks and wealth managers to offer bitcoin products and handle the backend operations. NYDIG currently manages approximately $4 billion, including derivatives, and is actively seeking clients among private banks and asset managers. While open to exploring ideas like a bitcoin ETF or trust shares, the firm remains focused on bitcoin.

Chou shared a similar skepticism regarding many Ethereum-based DeFi options, while maintaining cautious optimism about the future of DeFi derivative options.

She emphasized the importance of crypto-native products for harnessing the benefits of decentralized transactions without centralized authorities.

The Convergence of Traditional and Decentralized Finance

Traditional options now provide indirect access to cryptocurrency gains, while cryptocurrency itself is being used to create comparable, yet more accessible, financial products. These DeFi products are designed for new functionality, not merely price exposure.

The next generation of bitcoin whales, represented by figures like Elizabeth Stark, CEO of Lightning Labs, and Soona Amhaz of Volt Capital, may differ significantly from the traditional profile of Silicon Valley entrepreneurs.

Amhaz concluded, “The face of our industry is different than how the tech industry looked in the early 90s or how finance has looked since forever. We’re starting at a higher, more informed baseline. So, although there’s still work to be done here, I’m optimistic.”

Disclosure: Leah Wald and Leigh Cuen are volunteer co-founders of the Digital Salon Initiative.