When the going gets tough, the tough get their wallets out

Transcript

Angie Lau: What’s Asia crypto market sentiment and what are the driving factors? Why could non-fungible tokens (NFTs) be the gift that keeps on giving? And how will geopolitical shifts in this part of the world from Russia impact crypto? 

Welcome to Word on the Block, the series that takes a deeper dive into blockchain and all the emerging technologies that shape our world at the intersection of business, politics and economy. It’s what we cover right here on Forkast. I’m Editor-in-Chief Angie Lau.

Today we’re in conversation with James Quinn, managing partner at Q9 Capital, which serves a lot of family offices and corporates in Asia as a digital asset private wealth manager. So, I want to get some unique insights as to how Asian investors are dealing with the markets right now, what they’re thinking, how they’re feeling. Thanks for being here, James.

James Quinn: My pleasure, Angie. Thanks for having me.

Lau: I can only imagine the kind of calls you’re fielding these days from your private wealth clients and family offices. What are they asking you? What are they curious about? What are they concerned about?

Quinn: To be honest with you, although we do have a core base of private wealth and family office clients, we do cover a full sector from retail up to larger corporates. And frankly, we don’t get a lot of nervous calls, despite the market volatility, which you might kind of be surprised at. We sort of wondered as we saw the market kind of going sideways a bit from December and into the beginning of this year… going a bit lower.

Generally, they tend to be either holding or buying, actually, so that’s kind of a big change. I would have seen the space a couple of years ago, where people were more ‘tourists.’ Now, I think — especially for the folks who maybe haven’t invested all of the capital they were sort of thinking about — they’re actually kind of looking to get in, so our account openings have actually increased dramatically. I think some people are actually seeing this as an opportunity, perhaps to buy it at some cheaper levels than they were looking at a few months ago.

Lau: A few months ago, we were at all-time highs, and now there’s speculation that Bitcoin could potentially even hit US$20,000 before we see a rebound. What’s the sentiment at play here in the markets? When you come from the traditional investing world, from traditional banking — you’re now in crypto — how do you see these kinds of macro events, and what we’re seeing in the equity markets influence what’s happening in crypto?

Quinn: Well, I think what people are talking about right now is about the correlation. One of the things that crypto and digital assets were built for was, ‘Hey, the correlation is less.’ It’s not correlated with traditional markets. It’s a good place to invest to diversify your portfolio. And the correlation has been going up. It’s going up, in particular, as the market’s going lower. But I think generally this year it’s sort of been going higher than historically.

You can think about correlation roughly through two mental frameworks, and they’re both always at play. One is how correlated is the actual asset — let’s say gold and silver. Okay, they’re both jewelry, they both have some sort of value function. Yeah, maybe silver is seeing more industrial uses, but there are some similarities, so people can get their heads around that very easily.

Then there’s the correlation in how assets move because of who holds them. So, to give an example, let’s say in a given suburban neighborhood, all the house values are going down. So what are the used car values going to be in that neighborhood if everybody has to sell everything because they’re suffering? The cars and the houses themselves don’t actually have any correlation [as] assets, but [they have] the same holders.

So, I think what we’re seeing a little bit in crypto and digital assets is just institutionalization. As more people come from traditional finance, and more investors come in and are new to the space, they’re going to be holding both digital assets — crypto — and they’re going to be holding traditional equities — fixed income, whatever… all types of traditional assets.

So, especially when it’s market-off and you’re getting a margin call somewhere, or you’re just feeling you need to de-risk somewhere, everything is going to get hit a little bit. So, over time, we should actually only see an increase in correlation. Now, that doesn’t change the fundamentals. Does Bitcoin have anything in particular to do with a particular equity or the overall market? Or does a different digital asset or cryptocurrency or an NFT — which I’m sure we’ll talk about later — have any particular relationship to those assets? Probably that’s not changing dramatically, but the holders are the holders, and so when the market’s going down, you’re going to see a little bit of correlation, which, frankly, you’ve seen within crypto and across all assets.

Lau: We have seen that. It’s that spillover effect. We often talk about the decentralized aspect of this world, and yet if you’re the single holder, you’re also the single point of decision making in both traditional markets and in crypto. But, as you said, you’re seeing more. It’s almost counterintuitive — as people kind of leave the market, sell off, damping prices, you seem to be getting a pickup in Asia. Why do you suppose that is?

Quinn: I wouldn’t really say it’s necessarily Asia-specific — what we’re seeing on our client side and people coming in. It could partially be, but we tend to have a lot of people who are newer, or newish, to crypto, so they’ve been sort of looking to increase their holdings over the last year or two. They’ve been becoming more confident in the prospects of cryptocurrencies, digital assets and NFTs — the entire space as an asset class and as part of their portfolio, from an investment perspective, looking at the technology.

For them, this is an opportunity to increase. I suppose if you have most of your assets in crypto, then you’re probably not looking to increase at this point — you’re probably looking to de-risk. But I think the most important thing to think about is that it hasn’t necessarily been scaring people away. Our client onboards have actually, like I said, picked up dramatically, which I think is quite interesting. Yeah, there’s maybe some specific things going on here in Asia — NFTs are very popular, and that’s kept people interested. A lot of the gaming networks out here have been really instrumental in pushing NFTs along, and those marketplaces are working somewhat separately. But they haven’t been immune. 

Let’s say (Sandbox token) SAND has gone lower and Axie has gone lower as the rest of the crypto market has gone lower as well. I would say it’s more about our clients — that being the newer investors, which we call them — than just investors: people who’re looking to basically commit capital into the space as opposed to sort of being full-time traders who are doing it for their job or their work.

Lau: We saw a lot of institutional pickup in crypto investments in 2021. How do you view this continuing in 2022? Is institutional adoption cooling, or is it just getting started? 

Quinn: Venture capitalists had their biggest investment year in 2021. I think it was around US$30 billion. That was bigger than all the other years combined, so there’s a lot of capital sort of waiting to go into this space and further invest. I mean, a lot of that was raised — which I think is interesting, maybe, compared to what people were predicting a few years ago — by native crypto firms, who have actually been in the space for a while, and they’ve become really big and they themselves have become more ‘institutional’ as opposed to sort of the traditional finance names really taking a front page or the lead in a lot of crypto and digital assets businesses.

But to me, that means there’s more capital to be invested. Obviously, if the price isn’t going straight up all the time or isn’t — as they say in the community — ‘up only,’ you’re going to have more of a steady inflow into it, or even some outflow, like we’ve seen now. There have definitely been some sellers in January. There’s had to be, obviously, or the market would be going lower. But there’s a lot of money on the sidelines waiting to be invested into the businesses themselves which raise capital. But also these businesses are buying other businesses. You’re going to see a lot of consolidation, you’re going to see a lot of different corporate actions around that money coming in, as well.

So, I think it’s going to be more about building and using that capital to sort of grow businesses. But there are definitely going to still be interesting coins and different other types of — probably a lot of — yield opportunities as well, opportunities to make money — sort of more steady income — as it relates to cryptocurrency and digital assets.

Lau: So, when you take a look at this space, and as you advise your clients, and as you take a look at the opportunities in the market — what are they?

Quinn: I mean, right now, our clients are really just interested in creating a foothold, so they’re really sticking with the top coins as a start. There are very few folks that don’t have some position in Bitcoin, ETH or some other top-five names as part of their overall portfolio. And then what you tend to see is a bit of a divergence into things that they’re interested in or want to follow. So, like what we’ve talked about, a lot is sort of sticking with some tried and true types of investments that people have been with a lot. And then also, if you’re interested in NFTs, if you’re interested in digital art or something, and you want to follow this, then you kind of invest in that or look at that type of thing. It’s not really advice or a recommendation — it’s actually just reporting to you what people are already doing.

Lau: I want to hear more about that.

Quinn: Yeah, I think that actually makes sense. I mean, you cannot be an expert in everything, so, to try to leap on the next coin, sure, that works if the market’s kind of up only. But when people are sort of actually looking at pricing, now, well, you go in and look at the main things that have been around for a while, and then you focus on some things that make sense to you. Some other people are looking at some of the new layer-1s and thinking which of these layer-1s might be interesting competitors to say, ETH, or really complementary, frankly. I mean, it doesn’t mean that the world has to exist in (the same way as) what we’ve seen before. 

But don’t forget that as more and more people come in to digital assets, as more and more people come in to crypto, the main coins will be the beneficiary of that. Just the comfort level of people holding a wallet and dealing with that is what we’ve seen, and it’s been really helpful, and I think it’s just adoption, really.

Lau: Bitcoin’s only the beginning, from crypto to NFTs. What’s the risk appetite of diving into the metaverse, and how do family offices in Hong Kong and Asia see non-fungible tokens? I mean, you said it. A lot of your investors. It’s kind of like the gateway crypto — it starts with Bitcoin, then it’s ETH, and then it’s a bunch of the layer-1 top-performing altcoins, and now it’s NFTs. A lot of people in crypto are starting to see NFTs as a way to diversify your holdings. How are your clients here viewing this? What are you hearing on the ground there?

Quinn: Well, NFT is such a broad category. It means something different to everybody, depending on their viewpoint. We have a shop — a hub right here in Hong Kong, in (the business district of) Central — and it offers digital art NFTs. We have a lot of conversations with people coming into our hub, and they want to talk about crypto in general, which we do, and we do education there as well. But, they may look at digital art and think, ‘Oh, that’s what an NFT is to me.’

At the end of the day, there’s the technology part, but you’re still investing in art. When you’re looking at gaming tokens, that’s really a completely different purpose for NFTs, but an interesting one nonetheless. I mean, the non-fungible part is the important part — you’re buying a unique asset, as opposed to a currency. A Bitcoin is a Bitcoin, but each NFT is unique in itself.

I think people are thinking about diversification of these from the standpoint of how they get some kind of diversification for any alternative assets. If I’m investing in art directly, for example, well, that might not be very well correlated with my equity portfolio, except for what we talked about in the beginning. If everything is going down, everything is going down, but it allows so many more people to get into the space.

I think one of the most interesting things that we’re seeing is people thinking about financial innovation around NFTs. You can get paid a royalty as part of being an early owner or an airdrop to a given NFT. Or — here’s a kind of a famous one — in the pre-NFT days — I don’t know if you remember this — David Bowie bonds, more than 20 years ago.

Lau: Right, I do remember. Ok. I remember reading about it. 

Quinn: It was a big innovation. It was considered a big innovation at the time. But a bank had to issue that, and there’d be royalties attached to it. But yeah, you had this bond, and it was backed by something unique. Well, you can do that with a smart contract now in five minutes. And then you can (say), ‘Ok, you’re going to get this cut of the artist’s royalty going forward,’ or the artist gets a cut of his own painting in perpetuity, for example, or his own digital artwork in perpetuity.

And then on the gaming side, this pay-to-play thing. So, you’ve got people just sort of interested in the space and buying it, and — I have to be honest — there’s definitely still a lot of speculation around that. You’ve seen some of these prices go up like crazy on different marketplaces. So, for sure, there are people just interested in it from a purely speculative standpoint, but they’re starting to discover the innovation around that, and the repackaging, and the financial innovation that’s possible with NFTs — basically with crypto and digital assets in general — because of the unique pieces and how they can frame in people’s portfolios.

Lau: It’s absolutely true — the appetite and the excitement. Forkast had a holiday party, and we featured NFTs. A lot of people in the industry came to the party in Hong Kong. This was before Omicron, of course, and everything started slowing down again. But it was just really exciting to have so much interest in the NFT space that it was starting to migrate into the physical space, as well — that there were physical galleries that were popping up that wanted to display NFTs from the digital and metaverse realms to the physical realm. And I think in Hong Kong — home of Art Basel Hong Kong and so much interest in art and wealth — there’s just this really interesting intersection of interest in Hong Kong when it comes to NFTs. 

Do you think that the kind of interest that you’re seeing from a financial point of view is also cultivating something unique in Asia?

Quinn: Ok, I’m going to go back a little bit to the sort of broad part around NFTs. So, first of all, here’s something that I would guess is not unique to Asia, but it’s important for NFTs — that’s the fact that they’re tangible. You mentioned people looking at digital art that gets a lot of people interested in the space, or gaming. It’s tangible — something you can play or a token you can move around. It’s hard to get your head around Bitcoin and ETH and crypto, which doesn’t have any kind of physical representation, so to speak — it’s just numbers. But you own a piece of something that you can do something with — an NFT — and that’s, like, a gateway into crypto and the digital assets community.

But I think as regards specifically Asia, it depends on the types of NFTs you’re talking about. First of all, Asia is very comfortable in the metaverse — it’s always had high sort of online penetration. I think Korea was one of the leading countries in the world originally when WiFi started, and they’re still one of the top gamers. In China., actually, NFTs still remain very popular. I know they’re trying to promote their internal network and getting NFTs on that, so people are really looking at that as well.

NFTs are very comfortable in the metaverse. That’s sort of where they’re designed to operate. You can kind of imagine this visually digital world where you have your digital artwork, you’re playing a game, you’re existing in that. You’re socializing with your friends in the metaverse. And NFTs are really the power for that type of thing. And Asia has always been very comfortable in that. Yes, you have certain things, like the wealth sector might be interested in digital art, and other folks might be interested in gaming. I mean, the Philippines is the No.1 place driving Axie gaming, for example, and that’s a big part of NFTs, as well.

Lau: Well, you said it — Samsung, South Korea leading the charge in crypto adoption among large corporations. You have it announcing its NFT platform for smart TVs, its partnership with Cardano-based climate solution Veritree. 

Do you think that Samsung — these corporate moves into NFTs, into crypto — will inspire other industry giants to follow suit? And, as you view this kind of landscape, do you think that investors are going to start seeing these opportunities to invest in startups, in VCs and in platforms etc, beyond even just Bitcoin? Curious about that.

Quinn: Yeah, we already are seeing this. Corporates are definitely looking at the space. Investors have been investing into platforms that really don’t have much in particular to do with, say, Bitcoin, or even sort of the top crypto. They’re really, let’s say, NFT-specific. But it’s about more than NFTs. I think what you’re feeling is that these corporates are finding a niche. For Samsung, that’s a pretty obvious one, in terms of displaying NFTs and backing that type of thing. But I think there’s something for everybody in digital assets, and what you’re seeing is the technology itself and how it can power the rest of the assets globally, so I would expect to see a lot more of that — if not this year, over the next few years.

Lau: Institutional crypto funds attracted record inflows of US$9.3 billion in 2021. Will the trend continue throughout 2022? James, I want to hear your thoughts … especially as the regulators are starting to crowd into the space. All right, I said the ‘R’ word … Regulators and regulations. A lot of people are seeing 2022 as the year where the regulators are starting to intensify and get really serious. We started off the year with the Pakistani and Russian central banks saying they want to ban crypto activities. So, as investors ramp up interest, you’ve got the regulators clamping down. How do you see this dynamic playing out in 2022?

Quinn: I think it’s too big to ignore. Most of the regulators who haven’t been saying much — and pretty much all of them have been saying something — are going to have to speak up. I think generally, though, crypto has gotten to a point where it would much rather hear from regulators and see clear regulations. So, I think really what the market is actually dealing with is just, ‘What’s the messaging? Are you saying that we can operate and how can we operate?’ So, if a regulator came out with a clear framework — even if that framework meant it was much more restrictive than (the way in which) people have been operating, generally, I think that would be welcomed. When you think about all the institutional money — which still at this point is looking for a way in that’s regulatory-compliant but also just protects them from the unknown of how regulation would change — once that becomes clear, there’s a lot more money behind it. Because, OK, we know what this is going to be, so we can invest and have an outlook that’s longer than six months or a year.

I think that basically the space is pro-regulation at this point. There’s very little ‘regulatory arbitrage’ left. I think as a business model, the largest crypto firms are doing whatever they can to get regulated, and, if anything, they’re going to the regulators and saying, ‘Hey, just tell us what to do. If you give me a clear framework, we’re going to operate in it.’

Banning is a different story. I guess technically you could consider that a form of regulation, but it’s a decentralized world — it’s pretty hard for one location to say, ‘We’re going to ban this.’ Maybe that works in that location, but that doesn’t seem to hurt the asset class — you saw the movement of miners in China last year over to the U.S. and to different locations. And so I think that’s sort of what we’re dealing with. The technology is just too great to ignore. And if I’m a regulator, I’m thinking about a way to have my cake and eat it, too — protect everybody, but get as much of that innovation into my location as possible.

Lau: Well, that’s South Korea’s play, for sure. They want to own the metaverse. It’s a serious national economic goal — one of many. But more widely, if you take a look at institutional cryptocurrency funds, they did attract record inflows — close to US$10 billion in inflows in 2021, up from US$6.8 billion in 2020. And according to data by CoinShares, we saw a total of 37 investment products launched in 2021. That’s up from 24 in 2020.

Your prediction for this year? Where do you see this going? The number of investment products… what kind will we be seeing, and just the increased cadence of investments into the space?

Quinn: Hard to say. I would imagine barring a complete market collapse or something, if you will, that you continue to see at least the same amount of inflows as last year, or something similar. I know it was a big increase on the year before, but there’s money waiting to get in. The more clarity they can get, I think we’re going to see a lot more of that.

I assume the number of products coming out is only held back by what’s approved. There are so many folks out there looking to list new products and get more investment vehicles and opportunities for people — both from their, let’s say, traditional brokerage or traditional relationships and from the pure crypto side. There’s going to be a ton of innovation around that.

So, I would expect more money wants to come in. How much of that is able to come in sort of depends a little bit on the regulation, and how quickly things get approved, as well, in terms of going out. But, like I said at the beginning of our conversation, most of what we see from clients is, ‘Let’s put a little bit more money here to work and get some more opportunity to buy this at these current prices.’

Lau: And so what excites you about this space this year in Hong Kong, in this region, in Asia?

Quinn: I think I mentioned it before. We’re really excited about new products and financial innovation that’s coming around. The opportunity for people to earn enhanced yields, and have other ways to invest, and get good, solid returns through crypto and digital assets that are not available to them in traditional assets. But also just provide better risk-reward than they’re currently seeing.

It also excites me — just the amount of new people coming into the space, and how much really people are embracing the technology and the idea behind it. We have very few conversations where people are just like, ‘This is all going to zero. This is not interesting at all. I want to avoid this completely.’ I’m not saying nobody thinks that anymore, but most people take what you could call, like, at least a Bayesian approach — like, ‘I’m not sure about this, but I have to admit it could go somewhere. And so I need some kind of exposure just in case that happens.’ I mean, that’s a very legitimate way to start investing in something — like, ‘Hey, I’ve been kind of ignoring this for a while. It’s clearly around. I’m not sure I fully understand it or I want to go all in, but I have to plan for returns that might not be what I’m sort of modeling right now.’ And that’s why you have a diversified portfolio in the first place, but I think most people actually are coming in quite positive. 

Lau: Yes. What excites you about being here in Asia — what you’re doing in 2022 in crypto?

Quinn: We’re excited about the financial innovation, the amount of new products coming out we think is really interesting. We’re coming out with a lot of new products on our platform. The rest of the space is coming out with really interesting things around the opportunities for people to earn good yields, good returns on their investments, diversify across different tokens and different parts of the metaverse, different parts of digital assets and crypto. And the different innovations that you haven’t even thought of yet. That’s one of the most exciting parts for me, even though I’m technically a crypto insider. Even I have trouble following all the latest things that are going on. I have a day job, too.

And so I think that’s, like, what we’re trying to deliver to our investors, like, ‘Hey, you come into the platform and you have an opportunity to sort of keep up with all this new innovation, which is really exciting.’ But I think it’s just also the amount of new people, new investors, coming in. Very few people are still saying, ‘Oh, this is just complete garbage and it’s never going anywhere. I’m not going to do anything.’ Most people are like, ‘I kind of recognize this technology is interesting. I want to do something.’ Or at the very least, ‘What if I’m wrong? So I need some type of investment?’

That’s sort of a Bayesian approach — there’s a probability I’m wrong, I should have something on just in case. I had a client say he was investing for FOMO. I said, ‘Oh, like classic FOMO? Is this, like, (because) the market … was kind of going sideways at the time?’ And he said, ‘No, no. It’s sort of a long-term FOMO.’ He’s like, ‘My kids gave me grief because I didn’t buy an apartment in central London, like in the 1980s, when that would have done really well. And so they’re like, dad, don’t miss Bitcoin, too.’

So, basically, you just have a lot of people thinking, ‘You know what? This could actually turn out to be something interesting. And I’m thinking five years out, 10 years out, 20 years out, because the technology could be so revolutionary. I want to be part of it.’ So, you just have a lot of new people coming into the space, and they’re all somewhere different. But the exciting part about the financial innovation is there’s sort of something for everyone, which I think is great.

Lau: Including those kids, who will be very glad, I suspect, at some point in the future, that dad listened. James — so fascinating listening to all of these insights, and thanks for this conversation. It was a pleasure.

Quinn: It was my pleasure, Angie. Thanks.

Lau: That was James Quinn, managing partner at Q9 Capital, joining us on Word on the Block. And thank you, everyone, for joining us on this latest episode. I’m Angie Lau, Editor-in-Chief of Forkast. Until the next time.