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Will U.S.-China Trade Tensions Fuel the Institutional Growth of Digital Currencies?

Sep 4, 2019

Like both online lending and crowdfunding, cryptocurrencies have emerged as a modern alternative asset class founded by retail investors.

Throughout its relatively young lifecycle, cryptocurrencies have remained a retail dominated marketplace with institutions gradually and discreetly dipping their toes in crypto waters. Industry pundits are endlessly speculating as to when the institutional investors will aggressively enter the fray and fully embrace digital currencies as a viable asset class.

While no one disagrees that the widespread institutional acceptance would be a seminal moment for the cryptocurrency market, predicting the watershed event that will ultimately drive institutions to digital currencies is continuously being deliberated.

Many experts believe that the catalyst will be the SEC qualification of a bitcoin ETF. Others are banking on a universally accepted custodial solution for digital assets. Some have pointed to the launch of Facebook’s Libra coin. And there are those who are holding out for the day when bitcoin is accepted by as many merchants as VISA or Mastercard.

Recently, with the U.S. trade war with China escalating, we have seen tremendous volatility and turmoil in the broader markets. As such, fund managers have been increasingly looking to bitcoin as a safe haven—or, at the very least, a non-correlated asset class.

This begs the question: Will the U.S.-China trade wars be the proverbial straw that broke the camel’s back and lured even the most skeptical institutional investors to the cryptocurrency world?

I asked a few leading institutional crypto fund managers to weigh in.

Mark Yusko, CEO & CIO of Morgan Creek Capital Management, LLC, an investment management firm that advises pension funds, endowments, and wealthy individuals, believes that the recent events in China, which have exacerbated the global currency wars and brought the challenges of the fiat currency system into the popular consciousness, have emboldened institutions to begin to view bitcoin as a solid diversifying asset that can serve as a good macro hedge in their portfolios.

Yusko added, “We would expect to see continued institutional adoption on bitcoin and with the capital flight from China adding to that new demand, we expect a reflexive virtuous cycle to emerge of positive price movements that are followed by increasing adoption that further supports prices and encourages others to include bitcoin in their allocations.”

Bill Taylor, Chief Investment Officer of Entoro Wealth and international authority on investing in bitcoin and Fintech, shared a similar viewpoint. According to Taylor, institutional pent-up demand for bitcoin (and other cryptocurrencies) is increasing every day, particularly as regulations to facilitate the ease of investment in bitcoin become better understood. Taylor sees the institutional demand resulting from the U.S.-China trade wars also ultimately increasing and driving crypto prices higher; however, he views some of the current softness in bitcoin as “transitory, caused by Chinese investors ‘on hold’ with the Hong Kong situation, and both gold and equity markets offering traders more volatility.”

According to Timothy Peterson, founder of Cane Island Alternative Advisors and published expert on cryptocurrency investment and valuation, “Unlike gold or real estate, the spendable nature of bitcoin means it can serve as a currency of last resort, as we’ve seen in Venezuela, Turkey, Italy and increasingly the U.K.—countries that face economic and political uncertainty. A Sino-American trade war will increase this uncertainty globally. A portion of those people with concerns will look to bitcoin as a hedge against geopolitical risk. In a world that is increasingly interconnected economically and electronically, a single global digital currency—be it bitcoin or something else—has obvious appeal.”

While there seems to be a growing consensus that global economic uncertainty, in general, is bullish for digital currencies, I sometimes wonder whether it is even possible for non-correlated asset classes to exist in this ever-interconnected global financial universe where asset classes rise and fall, less due to fundamentals and more as a result of seemingly completely disparate events?

Perhaps augmented diversification is the only true safe haven. In which case, it may be the U.S.-China trade tensions that end up driving the institutional demand for virtual currencies after all.

The fact is, the institutions are on there way. Only time will tell whether it was the U.S.-China trade wars that forced their hands.

As Lou Kerner, fund manager and one of crypto’s most influential bloggers, maintains, “Institutional investors are on an inexorable path to bitcoin ownership as it emerges as a new asset class. So, whatever forces institutions to look at alternative investments is good for bitcoin. Trade wars force people to look at the world differently. Will it be a tipping point for bitcoin? Who knows? But the tipping point is coming.”

Indeed, the tipping point is coming.

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