A couple of weeks ago, a few friends asked me to weigh with my view of what it would take for more institutions to start moving into the crypto space. Why? For 5 years, I ran strategic research for a $100 billion+ pension fund and one of my responsibilities included identifying innovative investment strategies that hadn't yet achieved mainstream adoption.
At that fund, we had a large in-house legal team that always had a seat at the table. They rightfully took a hands on approach to anything that smelled 'innovative'. I don't say this to critique them- they were great and simply doing their job. Any slip up and we'd have an army of trial lawyers doing records requests, chewing up our valuable time and resources, hoping they could conjure up a class action law suit on behalf of the beneficiaries.
How did our in-house lawyers save us from this nightmare? One way was by reminding us of the prudent man standard associated with the fiduciary duty we had assumed. Merriam Webster defines this as follows:
a rule giving discretion to a fiduciary and especially a trustee to manage another's affairs and invest another's money with such skill and care as a person of ordinary prudence and intelligence would use in managing his or her own affairs or investments.
With this context, if you worked for a big institution, wanted it to make an investment in Bitcoin, but first had to prove to your legal team that it met the standard above, how would you run at it?
First of all, you'd have to make the case that it legally was an eligible investment. Imagine trying to explain mining, proof of stake, and 51% attacks, and the irreversible nature of transactions to a group of 60 year old board members. Next, imagine explaining to your legal team why you wanted to invest in an asset class that SEC refused to give guidance on as it related to their regulatory approach. These are not easy conversations my friends.
If we are able to get past that first hurdle, there are a dozen others, not the least of which is making a case for why this represents good value now. That case needs to include data and math (rightly or wrongly, technical analysis will be laughed at and dismissed immediately). You still want to show the historical trend though so you might start out with a regression to establish the long term trend. Using excel, you create and present the first chart below: A logarithmic regression of Bitcoin. You're excited because in-sample, one might argue that Bitcoin seems to be fairly valued relative to its historical trend. A bit of a dubious argument but we've got to start somewhere.
However, these in house lawyers are pretty sharp and some of them actually know a little math. Using the exact same data and a different log regression methodology, they come back with the chart below which shows that Bitcoin is grossly overvalued relative to its historic trend. Whose math is right? They both are. From there, you realize that you're going to have to get more creative as this is going to be an uphill fight. So how would you begin to structure a case?
I share this as a humble attempt to illustrate just how courageous these early adopting institutional investors are. This is no easy task. Like you though, I'm rooting for them!
