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(Kitco News) - The recent flurry of spot Bitcoin (BTC) exchange-traded fund (ETF) filings in the U.S. has made waves in the cryptocurrency ecosystem over the past three weeks and brought a boost of momentum at a time when the industry was starting to falter.
The fact that BlackRock kicked off the filing frenzy has helped bolster the institutional adoption of blockchain technology narrative, and could be the spark the market needed to kick off the next major bull market cycle for cryptocurrencies.
To get more insight into the institutional perspective on digital assets, Kitco Crypto spoke with Adam Guren, Founder and Chief Investment Officer for Hunting Hill Global Capital, an asset manager based in New York. .
Hunting Hill Global Capital has been offering hedge fund products, custom-managed accounts and advisory services since 2012, and added crypto-related trading services since 2016, with a focus on closed-end fund trades and investment trust trades, such as the Grayscale Bitcoin Trust (GBTC).
Guren said that while retail traders focus on trading individual currencies and chasing current trends, the focus of his firm has been on identifying dislocation opportunities available in these products and taking advantage of them.
After the market bottomed in 2021, Guren said they started to get the impression that “The next cycle in the space is going to look different than the last one,” and they wanted to “implement the idea of trying to find ways to get exposure by looking for practical use cases in digital assets.”
In May, Hunting Global Capital launched its Hunting Hill Digital (HHD) affiliate through a partnership with BaseLayer Ventures in an effort to “capitalize on the growing demand for investment managers that combine extensive experience managing complex trades and portfolios, disciplined risk management practices, and proprietary operational capabilities with a ‘crypto-native’ understanding of the digital asset universe.”
When asked what prompted the firm to move from TradFi into digital assets, Guren said it was a combination of things. “We pride ourselves on complexity premium,” he said. “So when things look difficult and challenging and dislocated, that's when we actually like to dive in and see why.”
“There was a lot of complexity premium in 2020 and 2021, in digital assets specifically,” Guren said. “There was also investor demand from our perspective. Because we are an SEC-registered company based in the US, institutions have gotten comfortable with us as a manager in the space.”
Many of the managers that work at Hunting Hill Global were around during the 2008 financial crisis, which provided a lot of experience regarding dislocations and counterparty risk. “That exposure during that time helped us manage through a lot of different things, including 2022 in the digital asset space,” Guren said.
“We are very comfortable here and are still able to get institutions comfortable with us and the offerings that we have,” he said, adding that the recent flurry of exchange-traded fund filings by BlackRock and other investment managers will also help with adoption in the U.S. “I think that they see the same thing that we see.”
Institutional interest in the U.S.
When asked if there has been an increase in interest from institutional investors of late, Guren said that the recent launch of HHD was well received.
BaseLayer Ventures is specifically looking to find different investments to capture the next wave of growth, “which they believe is in the digital asset space for certain parts of their brands,” he said.
“So I think that's somewhat unique for us in the sense that the investment manager role that we have can actually provide those services to institutions and to that specific company – and companies like it – because they need to figure out how to manage custody properly, they need to figure out how to manage the compliance and regulatory world in the U.S.,” he added.
Things like determining which layer-one (L1) or layer-two (L2) blockchain to use to develop products or loyalty programs remain challenging for companies looking to enter the blockchain space. “All of those things are really investment management-type of roles. Even though they're not traditional hedge fund roles, they are things that we are very good at and understand.”
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| Family offices see rising interest in digital assets |
Current opportunities
When asked about the types of opportunities currently available in the digital asset space, Guren noted that the fallout from 2022 has led to a lot of “distressed asset” opportunities that need to be reviewed.
“Many are looking at either buying assets or buying companies coming out of the ashes this year,” he said. “There are a handful of companies out there in the liquidation phase, so there are opportunities to bid on assets that are going through liquidation.”
Another opportunity set available is through the purchase of distressed companies to see if they can be restarted. “There are good businesses out there that have had bad balance sheets,” he said.
As far as other alpha opportunities in the market, Guren said, “We do think there are some interesting catalysts coming up in the future.” This includes the ongoing Ripple vs. SEC case in the U.S., which Guren said “is progressing, and we should start to see more news one way or the other.”
The ongoing case between the SEC and Grayscale is another, and Guren expects to see some resolution on that case in the fall. “I do believe that Grayscale has a chance of winning that case,” he said. “That doesn't necessarily mean that it will immediately become an ETF, but it will give them more firepower to get that conversation done. And I do think those catalysts are pretty important steps for the U.S. regulatory regime.”
In addition to buying distressed assets, another alpha opportunity is to buy claims on bankruptcies and the assets that could go along with them, “which can provide value in the future, should there be more value in those holdings than the market sees as a potential payout for those claims,” he said.
Decentralized finance
On the topic of decentralized finance (DeFi), Guren said the main hurdle for institutional adoption in the sectors is the lack of KYC/AML checks. “There is a way to interact with DeFi in a long-only setting through the qualified custodian rule” but a lack of KYC has made many investors hesitant, he said.
He gave the example of participating in liquidity pools as a way to earn passive income. “When you participate in a pool as a liquidity provider, how do you know who you’re trading with is above board?”
That being said, he noted that “multiple different solutions are being built right now that would provide that layer of security for somebody that needs to have that comfort level to do it. Some of them are decentralized, meaning the KYC/AML process is managed by a decentralized party, even though there is a centralized software that is built by a company.”
“Those are super interesting because it’s unique, entrepreneurial, and something that has not existed before,” he said. “It's a crypto-native solution to providing KYC/AML, which has its own benefits.”
Institutional interest in tokenization
On the topic of institutions and tokenization, Guren pointed out that stablecoins are a good example of tokenization that is working, though they aren’t often recognized as being a tokenized asset.
He said that the integration of stablecoins and other tokenized assets is “the next logical step in money markets, and the process has already started.”
The reason that the idea of tokenization is popular with some of the largest financial institutions in the world is “partly because of efficiencies that would come with settlement, and also because of efficiencies for collateral and other real-world use cases for the financial system,” he said. “There are also practical uses for Main Street, which is part of the reason we partnered with BaseLayer Ventures – to look for those types of real-world applications for blockchain in particular.”
Guren also sees an opportunity for blockchain technology to help bring greater efficiency to money markets by providing banks and companies with applications that utilize tokenized corporate cash to simplify operations and make them more cost-effective.
One area of concern noted by Guren is the tokenization of illiquid assets, which could make them liquid in token form. “It is going to be a challenge to find ways to provide liquidity to those illiquid assets. Just because they are tokenized doesn’t make them liquid,” he said.
And when it comes to the main projects that institutions are showing interest in aside from Bitcoin, Guren noted that the focus of many institutions has been on Ethereum, Polygon, and Solana, largely due to their smart contract capabilities and levels of adoption.
“Companies and brands are looking towards either solving their loyalty programs or finding ways they can link the digital and physical,” he said, so HHD helps them evaluate which L1 or L2 works best for them. “Ethereum, Polygon and Solana are typically the three that are most popular,” he noted.
He also pointed out that multiple institutions want to have a diversified portfolio of crypto assets “because they believe that the next bull market will include some other winners, and they’re just not sure which ones those are.”
When it comes to which area of the crypto market could be the breakout sector in the next bull run, Guren noted that institutions are really looking for projects that provide a practical real-world use case for blockchain that people can use on a consistent basis, and that affects their daily lives in a positive way.
“This could be in any sector, from the financial services space to consumer brands,” he said. “We're focused on trying to find those real-world use cases.”
