In fast era of economics, oil has been a tremendous great source to invest in the market. But time has changed, introducing crypto market.
For quite some time, oil is a perfectly normal thing for an institutional investor to invest in.
The thought process so far is that “oil prices will go up so I’m gonna buy some oil.
But if you are a hedge fund, or a pension fund, or an endowment, and you think oil prices will go up, and you want to buy oil, you have a bit of a problem.
Where will you put it? Oil is … slippery.
“It is also highly toxic, very difficult to store, and it smells bad,” as Bloomberg writer Tracy Alloway once wrote, “don’t try to buy a barrel of oil.”
But people want to buy oil, and financial markets abhor a vacuum, so there are ways for them to buy oil.
Chiefly institutional investors buy oil futures, which allow them to bet on the price of oil without actually having to put smelly barrels in their garage. Futures are non-toxic and odorless, and you can store them in a computer. But of course some institutions—mostly specialists in energy trading—go and trade actual physical oil, and have the … tankers or ventilated warehouses or whatever … necessary to store it.
And their trading—buying futures and selling physical oil, or vice versa—is what keeps futures prices in line with the actual price of oil. They provide, if you will, synthetic oil storage: If I want exposure to the price of oil without storing it, I buy futures, and the person who sells me the futures might be an arbitrageur who is hedging by buying and storing the oil herself.
Bitcoin is also, as far as I can tell, slippery, toxic, very difficult to store, and it smells bad. In particular, the history of Bitcoin involves a lot of incidents of:
People losing or forgetting their private keys and being unable to access the Bitcoins they store directly in a Bitcoin wallet.
If you are a person who is enthusiastic about Bitcoin, that is I suppose all part of the fun of investing in a novel censorship-resistant decentralized form of currency. But if you are an institutional investor, losing your Bitcoins because you forgot your private key, or because the exchange where you stored them got hacked again, is a bad look. Your clients will be unimpressed. This reality limits the ability of institutions to buy a lot of Bitcoin.
“There are a lot of investors where custodianship was the final barrier,” [Multicoin Capital partner Kyle] Samani said in a phone interview. “Over the next year, the market will come to recognize that custodianship is a solved problem. This will unlock a big wave of capital.”
Samani has been “testing Coinbase Inc.’s new crypto custody service, one of scores of such offerings in development.”
As remembered through different published articles, like, six months ago, when Cboe Global Markets Inc. and CME Group Inc. introduced Bitcoin futures? Part of the appeal of Bitcoin futures was that they would provide a convenient way for institutional investors to get short Bitcoin.
But another part of the appeal—I still think the dominant part—was that they would provide a convenient way for institutional investors to get long Bitcoin. Just as with oil, if you are an institution, you can buy Bitcoin synthetically in the form of futures, and be exposed to its price movements, and let someone else—the person on the other side of the futures trade—worry about how to store the Bitcoins.