By David G. Barry
To some, Cambridge Associates’ decision to appoint a
global head of digital assets earlier this year might appear to be ill-timed –
especially given how badly the sector has fared in 2022.
Cryptocurrencies, after all, have lost about $2 trillion in value since their
peak in 2021, the stablecoin terraUSD has collapsed, crypto lender Celsius
filed for bankruptcy and crypto-focused hedge fund Three Arrows Capital was
liquidated. All of this has led to further stresses on an array of companies in
the United States and internationally.
But Joe Marenda, the person appointed to that role by the global
investment firm and significant adviser to institutional investors, sees the
timing as ideal, especially given the potential of the underlying blockchain
technology.
“It’s a multi-decade transformation,” says Marenda. “We’re in the second inning
and who knows how many overtimes there will be. We are very early in the game.”
Institutional investors have to date been cautious about
going too heavy into the sector – but, as Marenda notes, “if you are in
venture, you own crypto.”
That, he said, is just the reality as more venture firms
have backed crypto and blockchain startups. In fact, the number of
crypto-focused funds has grown over the past five years to more than 1,500 from
just 15.
“I don’t think everybody realizes the technology itself is
extraordinarily powerful,” he says. “There’s lots of opportunities for the
blockchain to create new business models. … It is potentially revolutionary.”
That belief is what led Cambridge Associates to move Marenda full time to
digital assets. Marenda has spent 16 years at Cambridge Associates, largely
focused on hedge funds. Over the past five years, though, he has spent
increasing amounts of time diving into digital assets – a journey which began
with a client’s interest in the sector.
“The space has grown dramatically,” Marenda says. “It’s a very complicated
space. The nomenclature is such that one can’t just jump in and understand
what’s happening. It takes a while to understand the technology and the
protocols.”
The list of institutional investors who are doing something
in the sector include the Houston Firefighters’ Relief and Retirement Fund
(HFRRF), which announced in October that it purchased bitcoin and ether;
the Fairfax County Employees’ Retirement System and the Fairfax
County Police Officers Retirement System, which announced they have both
invested in crypto funds, and the Teachers Retirement System of Texas (TRS),
which is readying to invest in digital assets by sending out “small boats” into
the area, Eric Lane, TRS’ senior managing director of private markets,
told the pension fund’s investment committee.
Marenda said that despite the current conditions, interest
in the sector remains strong. During the last crypto winter in 2019, he said
inquiries about the area were few and far between. That is not the case this
time.
“I’ve been happily surprised that the number of inquiries and responses have
not fallen off,” Marenda said.
Despite the “July lull,” Marenda said, there have been questions about the
“mechanics” behind the bankruptcy of Celsius, Luna’s issues, and “how does A
connect with B and end up at D?” They also, he said, want to understand what
the blockchain means for “society, business, technology and investing.” One
thing he is stressing is that there is a similarity between the current crypto
downturn and the global financial crisis: it’s been “centered around people”
and had “poor risk management.”
“Risk management,” says Marenda, “did not seem to be at the forefront of
day-to-day operations.”
But the downturn, he said, may have created an apt time to invest.
“It’s all about the technology and the technological change. It’s not about
tokens and currencies and all that stuff,” he said. “If you are committed, now
is a time to [invest] because valuations are much lower than six months ago.”
He said that companies that might have been valued at $100
million in early 2022 or late 2021 are today being valued at $30 million. That
is a significant drop, but it’s also three times higher than the $10 million
valuation that such a company might have had during the last crypto winter.
That, in theory, is good news for the venture firms that were able to close
funds late last year or early this year.
“Things are definitely cheaper,” he said.
Many institutional investors, Marenda said, are holding off diving into crypto,
blockchain and digital assets because of the stock downturn.
“The broader market is pushing things off,” he said. “They are having to
rebalance their portfolios and think through other things. It’s slowed
everything down.”
Institutional investors also have been put off by the lack of structure, rules and
transparency – a situation he likens to what the hedge fund industry used to be
like. They will feel more “comfortable,” he said, when crypto becomes more
understandable and regulations are clarified.
The U.S. is behind others like Singapore, the Bahamas and Europe, but he said
legislation introduced by U.S. Sens. Kirsten Gillibrand (D-NY) and Cynthia
Lummis (R-WY) could provide necessary direction. Known as the Responsible
Financial Innovation Act, the legislation would create a regulatory framework
for digital assets that would encourage financial innovation, flexibility, transparency,
and consumer protections while integrating them into existing law.
“Hedge funds were a mystery, who they were, what they were doing was a
mystery,” he recalled about how hedge funds were viewed in the 1990s. “We are
in the same place today with crypto.”