Morgan Stanley released a report yesterday that described their take on Bitcoin and made passive mention of the crypto ecosystem in general. The report has been widely reported on (as we knew it would be) and it seems that the headline of choice is Morgan Stanley proclaiming that Bitcoin isn’t as much a store of value as it is an institutional asset class set to take on trading, and presumably, volatility needs at big banks and family offices across the globe.
While this language is and should be offensive to Bitcoin maximalists and anyone who believes in the original mission of Bitcoin – it certainly isn’t a surprise. If institutional (and a plurality of retail) clients ask enough times for something these institutions are going to give it to them, pure and simple. There is serious money to be made by creating expensive structured products wrapped around the guise of crypto volatility. The key words there are expensive and volatility. Expensive and volatility.
Morgan Stanley doesn’t have any interest in building out a warehouse facility or cold storage vault to house private keys and racks of hard wallets. There isn’t any money in it. At least not the kind of money that Tier 1 institutions have an interest in earning on that type of investment.
Instead, they are focused on several structured product initiatives that we’ve been made aware of that should be of interest to anyone attempting to get an understanding about how a powerhouse global investment bank is attempting to meet client demands.
Based on extensive discussions yesterday afternoon and again this morning we’ve heard three specific initiatives that are being *discussed* at Morgan Stanley (FYI – much like Goldman Sachs is in *internal discussions* regarding an Ethereum product to satisfy demand) and could come to market in 2019:
- A dedicated institutional trade desk that handles futures, OTC transactions, NDF like products that clients traffic across other Tier 1 institutions (Goldman, Citi).
- Internal discussions are ongoing as to whether Morgan Stanley uses Bakkt infrastructure *exclusively* with respect to Bitcoin futures transactions or using every resource that exists by 2019 (Bakkt, ErisX, CME, CBOE).
- Leadership in Morgan Stanley’s trading divisions are discussing whether or not to go all in on a Bitcoin NDF as well as an Ethereum product that has yet to be given a trading classification.
**Not included in the above list was a less prominently mentioned discussion point that included where does Morgan Stanley fall once a Bitcoin ETF product is created, as well as other SEC approved products throughout 2019. Discussions remain active as to whether or not Morgan Stanley creates their own branded products that are functionally identical to competitor products, or simply offer competitive products and whatever premium fee structures are inherent in the products themselves.
The discussions moving through trading rooms and in strategy sessions at the firm is not whether or not crypto is sustainable or a ‘flash in the pan’ bubble that will eventually fade. The discussion is focused on regulatory approvals and guidance, strategies to benefit from those new rules, and how to best position Morgan Stanley’s crypto products (should they choose to create native structured products) and services to its largest clients.
Which leads us to the dialogue in the Morgan Stanley research report making the rounds today. It adds context to the discussions internally as the firm positions itself for 2019; a year that those we spoke to believe will produce massive adoption, new (and relatively tame) regulations in the US, and trading volumes set to skyrocket.
The ‘money quote’ in the report, as it was told to us (to pay particular attention to) is this:
The net dollar amount in crypto hedge funds in 2016 was $380MM. Today it stands at over $6B.
You don’t need any other explanation for Institutional ‘fomo’ than those hard numbers. Those are funds that are eschewing fiat based products and diving into crypto, even in the midst of a bear market.
Morgan Stanley wants to be a real player in this market. They are working overtime to figure out just how to do it. Regulatory and legal hurdles need to be appropriately approached and handled, but when that happens they are planning to be at the forefront of what they believe will be a highly profitable new ‘super asset class’.