No to crypto... where were the investment banks? Where to from here?

 As Coinbase prepares to list on Wednesday, 14 April, and the global crypto market cap surpasses $2trillion this week, I can't help but wonder why the investment banks took such a negative view on this opportunity for so long. This has recently changed of course (which is not surprising as the Wall Street firms are known to hop on a bandwagon trade along with the best momentum traders). But for a long time we heard about Bitcoin being a "fraud" from a prominent banking CEO and similar negative comments (or silence - in the best of cases). Most banks in the peer group failed to set up crypto trading desks, nor did they provide serious research, custodial services, or assist the technology whiz kids who generally have minimal financial skills on how to navigate the space. Why? The best I can surmise is that there are 3 key reasons for their slow uptake:

1. The crypto space really took off in the wake of the financial crisis and therefore the investment banks were too paralyzed to get involved in something fringe they considered fringe.
2. Investment banks tend to cozy up to politicians and governments across the globe. Crypto currencies, by their very definition, are meant to distance themselves from traditional institutions and decentralize the power to individuals. Therefore investment banks were reluctant to promote such an idea.
3. Until late 2020 the global market cap of the crypto space was a few hundred billion. This may not have seemed like an attractive enough sandbox to set up shop and play in. This is similar to Apple which had shelved its electric car ambitions until recently, given they didn't see a large enough market opportunity. Now with Tesla's market cap having exploded, they are looking to revive those efforts. 

What an opportunity missed. Much has changed in the financial services space over the past few decades since I have been involved. The rise of fintech being one of the latest examples. But if one thing has remained constant, it is an insatiable thirst to make a buck. If there is money to be made, investment banks are never afraid to swoop in, much like seagulls on Zuma Beach who steal unguarded food off of beachgoers blankets. 

Some numbers: It appears that upon listing this week, Coinbase will virtually be the same size as the venerable Goldman Sachs. Companies such as Square and Paypal are already larger. Granted these are not pure crypto plays, as SQ and PYPL offer plenty of other services. But as early adopters in allowing clients to use crypto, certainly a large part of their market cap increases over the past 12 months has come from Bitcoin's appreciation. Coinbase made $1.8 billion in revenues in Q1 2021 (58% more than it collected in all of 2020) and it's 55% operating margin puts those of investment banks to shame (and theirs are nothing to sneeze at!). Coinbase also holds over 10% of the global crypto in custody for its clients. Come on lads, get involved!

It seems clear that over the next few months/years the investment banks will look to garner a larger share of the pie, both on the trading side as well as on the custodial end (this dovetails perfectly with their core businesses). This will most likely put a bit of pressure on Coinbase's margins, but certainly increase awareness of the crypto space and most likely lead to further inflows. If/when crypto ETFs are given the green light on the US exchanges, expect the investment banks to push, push, and push again their clients to create, list and invest in these new products. 

All this to say that after a month or so of relative calm and reduced volatility (which is a good thing long term), expect the crypto space to catch a second (or twenty second) wind (depending on your time horizon) over the upcoming weeks/months. Watch this space!