This content adapted from Two Prime Digital Assets’ April 27, 2021 report, “The Rise of Institutional Ethereum Investors,” available for free download here. For daily and weekly reportage and analysis of this fast-changing landscape, visit Two Prime Insights.
Neither Ethereum’s highs nor lows so far in 2021 have necessarily been huge surprises to Two Prime — or the institutional investors we help. Numerous statistical clues in the past year have justified our confidence, current, and past volatility notwithstanding, that institutional investors are arriving because they have discovered the right risk-managed exposure can minimize the downside and prove out in the long term.
This is why we also developed corporate treasury solutions to take advantage of yield, intending to capture 85% of Bitcoin and Ethereums’s upside while cutting 50% or more of the downside. (There are also ways to trade spot against futures on Bitcoin and Ethereum that earn a risk-free or very low-risk yield, taking advantage of discrepancies between spot and futures markets.)
Why Ethereum Was the Next Logical Step After the “Gateway Drug” of Bitcoin
Morgan Stanley and JP Morgan announced in April that they would offer actively managed Bitcoin funds. Bitcoin generated all the early attention while Etherum was still nascent as a mainstream institutional investment product — but we think there’s still a lot of juice left in the squeeze.
Both bankers and retail investors want to know some of the fundamental differences between Bitcoin and Ethereum; the chief differentiator is that Bitcoin is effectively a blockchain that just tracks the movement of Bitcoins (BTC), whereas Ethereum is a massive decentralized computing network that allows you to build all sorts of applications on top of the blockchain. It is both a coin and a vibrant fintech ecosystem unto itself.
Its astounding potential is just being realized: in the past 5-6 years, we’ve seen Ethereum give birth to NFTs (non-fungible tokens or unique single-digit scarce assets) to fungible tokens to a wide array of DeFi (decentralized finance) applications like lending exchanges.
Digital asset supply chains are all being built on top of the Ethereum network; ETH, which is the asset or token associated with Ethereum, is what’s used for computation power within the Ethereum virtual machine. You can think of it as fuel for processing in this global digital network. As more people use it, you would expect that it becomes worth more, which has generally been the case.
This is just one example of the breadth of companies building new solutions native to Ethereum: we’re seeing stable coins, dollar-backed solutions, new exchanges, infrastructure advances, and training resources.
Institutions that found success dipping their toes in the Bitcoin waters are naturally gravitating toward Ethereum because of this massive potential that is only still being realized.
Seeking the upside while maintaining compliance is front-of-mind for this new wave of institutional adoption. For example, the CME launch of Ethereum Futures was critical for providing compliant access to Ethereum-based opportunities. Andreessen Horowitz invested $25 million into online Ethereum scaling solutions.
Even with recent turbulence, we predict that we’ll see more, not less, of Ethereum’s potential being harnessed and shaped to suit the strategies of institutional investors who want intelligent exposure to digital assets.