Why Are Professional Investors Adopting DeFi Faster Than Bitcoin?

Professional investors are “getting” DeFi much faster than they can get Bitcoin (or Ethereum).

This is not conjecture; it is fact.

As the CIO of Bitwise Asset Management, I got a front-row seat to a test case for this hypothesis.

Bitwise is one of the largest and fastest growing cryptocurrency asset managers in the world, with $1.5 billion in assets under management. We primarily serve professional investors, including financial advisors, family offices and institutions.

We are best known for creating and running the world's first and largest cryptocurrency index fund - the Bitwise 10 Cryptocurrency Index Fund. Bitwise 10 holds the top 10 crypto assets weighted by market cap. For investors, it's a convenient way to acquire assets like Bitcoin, Ethereum, and Chainlink in a simple fund portfolio.

We launched Bitwise 10 in November 2017. Today, the fund has about $1 billion in assets. However, this growth takes time. You know, the fund did not break through $100 million until after October 2020, nearly three years after its launch.

The number of Bitcoin Lightning Network nodes is 17,642: Jinse Finance reported that 1ML website data shows that the number of Bitcoin Lightning Network (Lightning Network) nodes is 17,642, a year-on-year increase of 1.28%; the number of channels is 85,446, a year-on-year increase of 1.3%; the network The capacity is 3,983.82 BTC, a year-on-year increase of 6%. [2022/6/8 4:09:46]

In contrast, in February of this year, we launched the world's first DeFi index fund (we love being the first). The Bitwise DeFi Cryptocurrency Index Fund holds top 10 DeFi assets, including Uniswap, Aave, Compound, Maker, Synthetix, and more, weighted by market capitalization. The aim is to make it easy for investors to place bets on the growth of DeFi, rather than trying to pick winners.

Unlike the Bitwise 10 Cryptocurrency Index Fund, which took several years, our DeFi fund reached $100 million in three months.

The rapid growth of DeFi funds is partly due to market conditions and partly better execution by the Bitwise team. But another reason is that DeFi is easier for traditional investors to understand than Bitcoin or Ethereum.

Solana-based DEX Orca officially launched the centralized liquidity pool product Whirlpools: On April 25th, Solana-based DEX Orca officially launched the centralized liquidity pool product Whirlpools and started liquidity mining. Currently supported trading pairs include mSOL/USDT, mSOL/UST, mSOL/SOL, stSOL/USDC, stSOL/USDT, stSOL/UST, stSOL/SOL. Whirlpools allows liquidity providers to actively choose the price range at which they provide liquidity to improve capital utilization efficiency. (Medium)[2022/4/25 14:48:23]

When you get a job in traditional finance, one of the first things you learn is that the four most expensive words in the English language are "this time is different".

Investing history is littered with the wreckage of over-hyped paradigm shifts that never panned out.

The scars of the dot-com bubble, the housing bubble and a dozen other speculative manias have been etched into the memory of many on Wall Street. While a small number of investors remain open to new ideas, most choose to walk away in a hurry.

Survey: More than half of banks in Switzerland expect to offer crypto investment services to their clients within three years: January 13, according to a survey by Ernst & Young (EY), more than half of banks in Switzerland are considering offering crypto to their clients within the next three years Currency Investment Services. A survey by EY of 90 executives at different Swiss banks found that 55% of Swiss banks plan to introduce crypto investment products to their clients. While banks in Switzerland have so far been largely reluctant to offer investment opportunities in cryptocurrencies, more than half of the banks surveyed currently plan to launch offers to invest in crypto assets within the next three years, the report noted. It added that private banks have shown the greatest interest in offering cryptocurrencies. (Coingape)[2022/1/13 8:45:56]

Bitcoin is definitely "the new thing". Nobody looks at Bitcoin and says: Remember the last time a new global currency was born without sovereign backing and turned into a roughly trillion dollar asset?

However, DeFi is familiar to traditional investors.

Over the past four decades, traditional investors have watched software and technology disrupt industry after industry. Manufacturing, media, telecommunications, retail...it's a relentless, slow-moving wave of disruption consuming everything in its path.

Avalanche team Ava Labs reached a strategic partnership with Turkish electric vehicle manufacturer Togg: On January 8, Avalanche team Ava Labs announced a strategic partnership with Turkish electric vehicle manufacturer Togg. They will design and build Togg based on smart Contracted services to improve autonomous vehicle performance.

Togg will implement smart contracts and blockchain technology, and store vehicle maintenance and parts information on the Avalanche blockchain, and may later launch a used car market based on the Avalanche blockchain. (source link) [2022/1/8 8:34:32]

As Mark Andreesen said, software is eating the world.

So when you tell investors that decentralized finance involves using software and automation to disrupt the financial industry, their eyes light up. They have seen the "movie" and know how it ends. They liked the ending, very much.

However, what really gets traditional investors excited about DeFi are real-world examples like Uniswap and Aave.

On-chain option protocol Pods has been launched on the Ethereum mainnet: On October 12th, the on-chain option protocol Pods announced that it has been launched on the Ethereum mainnet, and has opened an ETH that expires on November 26 with an exercise price of $3,200: USDC put options liquidity pool. Pods is an on-chain option protocol, with investors including Boost VC, Framework Ventures, P2P Capital, BitScale, Zeeprime, The LAO, etc. Pods includes two core components, Options Instrument and Options AMM, allowing users to create put options and call options, and trade them through a novel option AMM, which updates option prices with the Black-Scholes algorithm, and based on supply and demand Conditions automatically update the implied volatility programmatically. The Pods protocol runs on smart contracts powered by the Ethereum blockchain and can provide different exposures to users in DeFi. [2021/10/12 20:22:40]

When you first describe DeFi to someone who isn’t in crypto, they might think it’s a message from the future: an idea that’s conceptually cool, but far from practical.

Examples like Uniswap and Aave show that DeFi has arrived.

For example, while Uniswap is an oversimplification, it is easy to introduce it as a decentralized competitor to Coinbase. Traditional investors know Coinbase, which recently went public at a $60 billion valuation and became the world's largest publicly traded cryptocurrency company. It's an amazing business with a rapidly growing user base and tremendous revenue growth.

But Uniswap is growing faster. Starting from zero a few years ago, Uniswap’s transaction volume reached $50 billion last month while generating more than $250 million in fees. It's incredible.

Likewise, Aave is a relatively new lending protocol that is a decentralized competitor to BlockFi. At the last time I checked, on May 16th, it had over $8 billion in outstanding loans and was generating over $1 million in revenue per day.

These numbers are understandable to traditional investors. Their vernacular on Wall Street is: revenue growth, user growth, and so on. You can even apply traditional valuation techniques such as price-to-sales multiples. However, valuing Bitcoin is extraordinarily difficult.

In traditional investing, an edge refers to knowing something that others don't.

It's the Holy Grail: a mythical thing most investors chase after, but many never see.

One of the reasons I like talking about DeFi with traditional investors is that it's a rare opportunity that just maybe gives them a possible edge. Because while many investors are excited to hear about DeFi, almost no one has heard of it yet. The mainstream media and much of Wall Street has so far been blind to it.

Imagine if instead of a decentralized crypto protocol, Uniswap was a well-funded traditional Silicon Valley startup. Then, investors will be full of praise for it.

Check out this business today! It was nothing two years ago, and now it is a big company. Two years ago it was nothing, now it generates $250 million a month in revenue!

The founder would appear on the cover of Forbes, posing on a rocky headland in a Patagonia tank top, gazing out to sea under the breathless headline: The Fastest-Growing Startups of All Time.

But because it was just a crypto asset with a pink unicorn logo-zce and an impossible backstory, it was overlooked. To this day, the word Uniswap has never appeared in the Wall Street Journal.

The future of DeFi will be extremely turbulent. This is a very early market and faces a series of huge challenges, from regulatory risks to pro-cyclical leverage to security issues and more.

But the long-term prospects of DeFi are exciting, the story can be convincing, and I believe that institutional investors may enter the market sooner than many people think.

Footnote:

CNBC. "Some high-profile PayPal veterans just invested in the world's first cryptocurrency index fund," Dec. 12, 2017.

Source: CoinMarketcap.com. Data as of May 16, 2021

Source: A16z. A16z. "Why Software Is Eating the World." - Marc Andreesen.

Source: A16z The Block and Token Terminal. Data as of May 16, 2021.

Source: Token Terminal. Data as of May 16, 2021.

Critics will point out that Uniswap token holders are not currently accumulating any income generated by the protocol. This is not a problem. Token holders are expected to encroach on a portion of the fees in the near future. Traditional investors have seen pre-revenue companies like Facebook before and understand that user growth is a key metric to watch.

Investing in crypto assets is inherently risky, including possible loss of principal. Nothing herein is and should not be construed as a recommendation to buy or sell any securities. Past performance is not indicative of future performance.

Note: The author of this article is Matt Hougan, Chief Investment Officer of Bitwise Asset Management. The company is one of the largest and fastest growing cryptocurrency asset managers in the world. Prior to joining Bitwise in 2018, Matt had a ten-year career in the exchange-traded fund (ETF) industry and was also the CEO of ETF.com and Inside ETFs.

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