Crypto Long & Short: Bitpanda’s Raise Is About More Than Market Infrastructure

Weekly insights, news and analysis for the professional investor

By Noelle Acheson, Managing Director of Research

March 21, 2021

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"The self that goes on changing is the self that goes on living." – Virginia Woolf

Hi all!

You might notice something different about this newsletter. Anyone thinking of doing a spring clear-out will know how good it feels to spruce up your look every now and then. In a sense, this newsletter has a new wardrobe to help it evolve along with the market it covers.

We hope you like it. Progress always involves change, and CoinDesk wants to bring to you content that you find useful, in a format you find convenient. Do let us know if there's something you'd like us to add (or, why not, subtract) – and if we're doing anything right, we're always happy to hear about that, too. 😊

Below I talk about recent crypto company fundraising, focusing on what the Bitpanda raise says about market development. I also look at the loud signal that Morgan Stanley is sending financial advisers of all types.

And if you're interested in hearing more about some of the main risks facing bitcoin and ether, join my colleague Christine Kim and myself for a free webinar that will pull on more topics from our recent report "Bitcoin + Ether: An Investor's Perspective." It's on Wednesday, March 24, at 12:30 a.m. ET, and you can sign up for free here. See you there, I hope!

Read on...

– Noelle

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THE BRIEFING

Bitpanda's Big Moment

The pace of startup raises in the crypto industry, especially for businesses involved in building or operating crypto market infrastructure, has passed from a gentle canter to what feels like a gallop. I keep a note of the raises that CoinDesk reports on, and did some counting this morning: 14 in January, 24 in February, and so far this month – with a week and a half still to go – we're at 32. That's acceleration.

While most raises are under $10 million, so far this year there have been four (that I am aware of) that were greater than $100 million. Two of them were this week. One was crypto custodian Fireblocks, which raised $133 million. The other was a $170 million Series B round for a crypto market-infrastructure player that I confess had not been on my radar as much as it probably should have been.

I'm talking about Bitpanda, a crypto exchange and card issuer headquartered in Vienna that, with this raise, is now valued at $1.2 billion. This makes it one of Europe's largest crypto platforms, and Austria's first unicorn ever. Let's take a moment to appreciate that Austria's first unicorn is a crypto company.

This raise is worth looking at a bit more closely in that it embodies some deeper trends that will most likely continue to get noisier as the year progresses.

One is the self-reinforcing impact of crypto price movements. Increasing crypto prices lead to increasing revenues at market-infrastructure providers, which leads to more investment, which develops better on-ramps, which leads to more investors coming into the market which leads to increasing crypto prices. And so on.

This is evident in the amount raised. For context, Revolut's Series B was roughly one-third the size. What's more, Bitpanda's raise came just six months after a $52 million Series A, when the average time between rounds is 18 months.

Bitpanda has been profitable for four years, according to CEO Eric Demuth, so it doesn't really need the funds. This raise highlights a notable ambition: "to become 'the' investment platform for all of Europe."

But wait, Europe has a slow and fragmented regulatory approach to finance and innovation, right? It doesn't even yet have full capital markets union, so how can there be a pan-European crypto investment platform?

This is the second intriguing development highlighted in the Bitpanda funding round: upcoming European legislation that aims to create a unified approach to crypto industry oversight. This is potentially a very big deal.

Opening doors

Published in September 2020, the EU's "Markets in Crypto-Assets Regulation" (MiCA) aims to implement clear-cut rules and long-term legal certainty in the regulation of crypto assets. As usual in the European Union, however, clear-cut rules are usually anything but, as each member state has some leeway in the interpretation and implementation. And MiCA's text is not yet finalized.

There does seem to be momentum, however, and not just because of the intensifying interest from all types of investors. Just this week the European Securities and Markets Authority issued a reminder about crypto asset risk. The momentum is also propelled by concern over the threat that privately issued cryptocurrencies could pose to financial stability. MiCA would also regulate stablecoins.

MiCA will bring a unified policy to crypto asset services, clarifying the regulatory status of crypto assets and their market-infrastructure providers. What's more, it will enable crypto services in one member country to legally operate in any other.

And crypto asset service providers will be subject to requirements regarding capital needs, insurance coverage and more. This will instill greater institutional confidence in service providers' legality and financial soundness. Greater legal certainty around market development will attract both investors and builders, accelerating the emergence of regulated crypto services.

In terms of institutional investment, the U.S. will continue to dominate the global financial stage. It has the world's largest capital market and the largest funds. But Europe has so far shown itself to be more forward-thinking about the eventual fusion of traditional and crypto markets. A handful of stock exchanges list crypto-backed products. Some are developing entire token ecosystems. Two European crypto asset managers are now listed companies. Traditional banks are offering crypto trading and custody.

What's more, Bitpanda's sights appear to be on more than just being the biggest crypto exchange in Europe. Demuth told TechCrunch this week that the company was "shifting to become a pan-investment platform, not just a crypto broker."

Its Mifid II license gives it scope to eventually trade other types of assets. According to reports, the company will add fractional trading of traditional shares in April. And, given their new war chest, it's unlikely the expansion of offerings will stop there.

Given the investment and regulatory interest in helping platforms like Bitpanda achieve those goals, it could be that Europe is where the merging of traditional and crypto finance takes shape first.

But whether the U.S. or Europe takes the lead in crypto market progress over the next few years really doesn't matter in the grand scheme of things. What matters is that the progress is accelerating and becoming almost tangible. It's morphing from vague futuristic ideas to real rules guiding real platforms that offer real products to a changing market. And progress in one hemisphere will support development in the other.

It's becoming increasingly apparent that the rapid change in crypto market infrastructure that we've seen over the past year was just the warm-up.

(Thanks to Nelson Rosario and Cris Carrascosa for inspiring this thread.)

Momentum and gateways

This week, CNBC's report that Morgan Stanley was allowing its financial advisers to put client funds into bitcoin sent ripples through the wealth-management industry.

The firm, one of the largest asset managers in the world with over $4 trillion AUM, will give clients access to three bitcoin funds via its platform. Two of these funds are managed by Galaxy Digital, and the third is overseen by FS Investments and NYDIG.

For now, the bitcoin funds are only available to clients with accounts that have been active for at least six months and are worth over $2 million ($5 million for investment firms), and there is a limit of 2.5% of a client's net worth.

Nevertheless, the move is significant for the whole market for the signals it sends:

Clients are demanding bitcoin exposure. We knew this anyway, but here's more proof.
Bitcoin is now officially investment grade. Morgan Stanley's acceptance of bitcoin's liquidity, custody and market integrity is a loud stamp of approval. This signals to financial advisers of all types that this market is worth thinking about with an open mind.

These signals won't just reach investors. They will also reach other investment houses and financial advisers, who will probably scramble to offer similar services rather than be seen as overly conservative in a low-yield market that is pushing investors further along the risk curve.

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CHAIN LINKS

"There are plenty of things that people want and value highly that have no intrinsic value. How about a painting or a diamond or a bar of gold?" – Howard Marks, in a video interview

"For speculative investment opportunities to rise to the level of an investable asset class that can play a role in diversified investment portfolios requires transformational progress on both the supply and demand sides. With cryptocurrency, we think that threshold is being reached." – Morgan Stanley Wealth Management, in a report released this week

"Importantly, small changes in investors' overall perceptions about Bitcoin can have a large impact on its price, especially because relatively few bitcoins are in circulation. So, if several pension funds or large asset managers with trillions of dollars decide to allocate a few basis points of their portfolios in a cryptocurrency, it can have a very large impact." – Deutsche Bank Research, in a report released this week

SEC commissioner Hester Peirce gave a speech this week at the British Blockchain Association's conference in which she discussed her view on the regulator's inconsistent reasons for rejecting previous bitcoin ETF applications:

"Rather than applying the fairly straightforward standard that we have typically applied in approving other ETP filings—including for precious metals like palladium and platinum—we have insisted on increasingly sophisticated analyses of the relationship between the underlying spot market and the futures market to determine the susceptibility of these markets to fraud and manipulation. Not only is it unclear whether prior non-crypto ETP filings could have passed muster under this more rigorous approach, the ever-shifting goalposts are unfair to innovators who spend ever-increasing amounts of money on attorneys and quantitative experts only to find that they have failed to hit a target that has moved once again."

She also pointed out that the SEC stance has heightened risk for retail investors, rather than protected them:

"The SEC's reluctance to permit traditional investment vehicles to hold bitcoin or bitcoin futures has contributed to investors seeking more expensive, less convenient, or less direct substitutes, but it also has heightened the stakes of any regulatory approval for a mainstream retail product we might one day grant. By waiting we also have magnified the first-approved advantage in the bitcoin ETP or registered fund space. Moreover, because we have comported ourselves like merit regulators, investors might view any approvals as an official blessing by the Commission about the quality of the products we approve. That would be the wrong inference to draw."

Speaking of ETFs, the SEC acknowledged the ETF application submitted by VanEck, formally kicking off its 45-day window to make an initial decision on the proposal. TAKEAWAY: If approved, the ETF would be the first bitcoin ETF in the U.S., and its approval would send a strong signal to the global investment community that the market has "grown up" and now passes the SEC's rigorous (albeit contentious) standards.

First Trust Advisors and SkyBridge Capital, the hedge fund run by Anthony Scaramucci, have filed an S-1 with the SEC for the "First Trust SkyBridge Bitcoin ETF Trust," to trade on NYSE Arca. TAKEAWAY: They join WisdomTree, NYDIG, Valkyrie and VanEck in the queue, with Grayscale (a subsidiary of CoinDesk parent DCG) hiring ETF positions.

Grayscale Investments (a subsidiary of CoinDesk parent DCG) has launched five new trusts based on decentralized application tokens Chainlink (LINK), Decentraland (MANA), Brave (BAT), Filecoin (FIL) and Livepeer (LPT). TAKEAWAY: This is a meaningful nudge to institutional investors to look a bit further down the market cap rankings for potential – and the inflows this is likely to produce will send not just funding but also more mainstream attention to innovative platforms and use cases.

Trading platform eToro will become a publicly traded company via a merger with special purpose acquisition company (SPAC) FinTech Acquisition Corp. V. The combined entity will have an implied equity value of about $10.4 billion, reflecting an implied enterprise value for eToro of about $9.6 billion, according to the company. TAKEAWAY: This adds to the list of crypto market infrastructure companies to go public, boosting our access to financial statements and a better understanding of the business dynamics of the industry.

Kraken could also soon contribute to that list. The crypto exchange, which has been trading since 2011, is reported to be considering a direct stock exchange listing in 2022. TAKEAWAY: Kraken is a key player in the industry, offering not only one of the leading exchanges, but also the first regulated "crypto bank" after receiving a bank charter from the state of Wyoming. While those would be some financial statements I would love to take a look at, it's possible that an eventual listing, should it materialize, would be for only part of the growing company's business lines.

SBI Crypto – a subsidiary of Japanese conglomerate SBI Holdings – is opening up access to its mining pool for both institutional and retail customers. TAKEAWAY: This is part of what seems like an emerging trend to bring greater liquidity to bitcoin mining as an investment asset, and follows just one week after North American mining firm Foundry (a subsidiary of CoinDesk parent DCG) opened up its mining pool to institutional customers.

The latest survey by Bank of America shows that inflation fears have replaced the pandemic impact as fund managers' biggest worry, and that "long bitcoin" is still the second-most crowded trade, behind "long tech." TAKEAWAY: "Most crowded" does not mean "unadvisable." It does warn investors that, should sentiment turn, the stampede toward the exit could be nasty.

An Investopedia survey showed that 20% of respondents have added bitcoin to their portfolios, while 60% believe it is in bubble territory. TAKEAWAY: The U.S. financial website's editor in chief Caleb Silver said that respondents' concerns were founded, as bitcoin's price has risen without any specific catalyst other than growing institutional demand. I'm perplexed as to why that wouldn't be considered a catalyst.

Hong Kong-listed software firm Meitu has bought another 16,000 ETH valued at around $28.4 million and 386.086 BTC valued at approximately $21.6 million. TAKEAWAY: Could this be another corporation on its way to becoming an ETF-by-proxy? These purchases more than double the previous investment earlier this month. The company's share price did not noticeably react to the first announcement, but has picked over the past couple of days. I haven't seen the 2020 balance sheet, nor am I clear on the distribution of the crypto holdings among subsidiaries – but we can probably conclude that $90 million is starting to feel more material for shareholders than the previous investment of $40 million. Also, given that Meitu's main business line appears to be social media apps, this could end up being part of a strategic business pivot.

A message from CoinDesk

The Risks Vs. Rewards of Bitcoin and Ether

Join CoinDesk Research on March 24, 2021 at 12:30 p.m. ET for an in-depth discussion about the unique risk/reward profile of BTC and ETH.

In this 30-minute webinar, crypto analysts Christine Kim and Noelle Acheson will give an overview of the various risk factors impacting the long-term value propositions of these crypto assets.

Sign up for free HERE.

This discussion will dive deeper into the topics featured in the CoinDesk Research report, "Bitcoin + Ether: An Investor's Perspective," which is available to download for free from the CoinDesk Research Hub.

Podcast episodes worth listening to:

Why a Norwegian Billionaire Is Betting on Bitcoin's Positive Environmental Potential – Nathaniel Whittemore, The Breakdown
Robby Gutmann (NYDIG) on the Institutionalization of Bitcoin – Nic Carter, On the Brink
Crypto for Institutions 3: Seth Ginns – Investing Beyond Bitcoin – Ted Seides, Capital Allocators
Crypto for Institutions 4: Ari Paul – Exploiting Inefficiencies in Crypto Trading – Ted Seides, Capital Allocators
Bitcoin as Investment Portfolio Insurance with Greg Foss – Peter McCormack, What Bitcoin Did
Bitcoin as Investment Portfolio Insurance with Greg Foss – Peter McCormack, What Bitcoin Did
Bitcoin On-Chain Analytics & Timing w/ Charles Edwards – Preston Pysh, Bitcoin Fundamentals

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