Chainalysis is the blockchain analysis company. We provide compliance and investigation software to the world's leading banks, businesses, and governments. Our experts in financial crime and economic analysis empower our customers to derive insights they can act on.
Backed by Accel, Benchmark, and other leading names in venture capital, our mission is to build trust in blockchains among the world’s leading institutions to expand the ways people can transact globally. We create transparency for a global economy built on blockchains, enabling banks, businesses, and governments to have a common understanding of how people use cryptocurrency. For more information, visit www.chainalysis.com.
Thought leader
Philip Gradwell is Chief Economist at Chainalysis and a data analytics expert. Prior to joining Chainalysis, Philip led a team of economic consultants working globally on energy system analysis and climate change economics.
As the Chief Economist, he analyzes on-chain data to understand cryptocurrency markets. His analysis includes identifying economic fundamentals, how cryptocurrency moves on-chain between exchanges and across borders, and the nature of cryptocurrency crime, amongst other topics.
Q&A with Philip Gradwell
What is your view on the impact that cryptocurrencies are having in reshaping wealth management? What is the current state and how do you foresee the space moving forward?
Cryptocurrencies, particularly Bitcoin, offer a new asset in which people can store their wealth. Investors first took notice of this narrative in 2017, when the price of Bitcoin spiked. Since then, the market infrastructure has been built to improve liquidity, and compliance technology and processes to control risk have improved significantly. Most importantly, demand for assets with a stable and limited monetary policy has increased.
Bitcoin has demonstrated resilience in recent market turbulence. On 1 September 2020, the price per Bitcoin closed at $11,927, 37% above its pre-Coronavirus level on 28 February, 3% down from the Year To Date (YTD) high, 143% up from the YTD low, and 66% up from 1 January. As the wide range of prices indicates, Bitcoin remains a volatile asset and its future price level is still highly speculative. However, its recovery from the March Coronavirus crash has been in line with, or indeed above, other assets. The S&P 500, for example, is 19% above its pre-Coronavirus level on 28 February as of 1 September.
Bitcoin likely delivered this performance because most investors hold it as a store of value, and they remained unperturbed by the market swings. Our analysis of the Bitcoin blockchain shows that over 60% of circulating Bitcoin is currently held for investment. We can identify the investors who have never sold more than 25% of their Bitcoin holdings and have often held onto their Bitcoin holdings for many years. We saw strong evidence in March of long-term Bitcoin investors’ support for Bitcoin when, despite falling prices, just 1.7% of the Bitcoin moved was from investors who have held Bitcoin for more than a year.
Another 20% of Bitcoin is likely lost, having been acquired in the early days before Bitcoin was valuable enough to look after and during times that custody solutions were underdeveloped. Under 20% of Bitcoin is more actively traded, providing liquidity for those moving in or out of the asset. A further 2.4 million Bitcoin is yet to be made available, with supply currently increasing by 1.8% per year. This inflation rate will keep halving every four years, with mathematical certainty, until the total 21 million Bitcoin are mined. The increasing scarcity means the window of opportunity to join others storing their value in Bitcoin is starting to close.
Bitcoin’s performance in an uncertain world is also likely supported because it is held globally and moves across borders frequently. At Chainalysis, we can estimate the geographic region of Bitcoin holders and follow the flow of funds between regions. The main market is Eastern Asia, responsible for 47% of Bitcoin flows since the beginning of 2018, followed by North America, with 28%, Western Europe with 17%, and the Rest of the World (RoW), which accounts for the remaining 8%. There are strong local markets, with 58% of flows occurring within regions, due to venues specializing in local fiat currency trading. But Bitcoin is globally interconnected, with 42% of flows between regions. The global user base combined with the option to easily move wealth between regions means that Bitcoin is much more valuable than other assets.
Bitcoin is more liquid than ever before. Services for institutional investors, including trade execution and custody, are widely available. Derivatives products are being offered by traditional venues, such as the CME and ICE’s digital asset venue Bakkt. Wealth managers no longer have to become specialists on what is likely to be a small share of their portfolio. A professional services industry for cryptocurrencies is now a reality.
Moreover, Bitcoin is more compliant than ever before. Compliance is now mainstream, with Chainalysis providing compliance software to over 180 cryptocurrency exchanges and financial institutions, including Gemini, Barclays, and Square. The Financial Action Task Force has developed a global regulatory framework and law enforcement agencies around the world are regularly prosecuting cases involving cryptocurrency. As a result, Bitcoin’s reputation as a criminal’s currency is outdated, with around 1% of transaction volume related to illicit activity in 2019. The fact that Chainalysis can provide such a statistic, due to the transparency of transactions recorded on the blockchain, demonstrates the confidence that investors can have in the legitimate origins of their holdings.
Wealth managers are re-evaluating old strategies and exploring new options in a world shaped by Coronavirus. Cryptocurrencies are still a risky bet on the growth of a new technology however Bitcoin in particular has a global user base of long-term investors that have supported its value in recent market turbulence. With improved liquidity and compliance, and increasing scarcity, Bitcoin may be worth consideration as a store of value for wealth managers.
What solution(s) does your company offer that wealth and asset management firms should consider?
Customers of asset and wealth management firms are keen on cryptocurrencies, even though they remain cautious. Fidelity Digital Assets’ recent survey of 774 investors found that high net worth individuals are the investor group already holding the most cryptocurrency after dedicated cryptocurrency funds. Given recent events and the value proposition of Bitcoin, customer interest is likely to increase.
Asset and wealth management firms have the trust of their customers, so they will be the first destination for questions about investing in cryptocurrencies. Therefore, cryptocurrencies offer a new opportunity to educate asset and wealth management clients. Asset and wealth managers do not have to invent this all on their own but they do need to know what steps are required to invest in cryptocurrency and whether to offer this in-house or via a partnership.
The steps for asset and wealth management firms to offer cryptocurrency investment are relatively simple. First, it is crucial that they be informed about the market so as to provide sound investment advice. Second, trade execution is required. Third, cryptocurrencies must be securely stored (i.e. custody services).
Chainalysis can help asset and wealth management firms be informed about the market. There are many opinions about cryptocurrencies but investment decisions should be based on data. Yet high quality, meaningful data is hard to source. At Chainalysis, we have been analyzing and explaining cryptocurrency data to law enforcement, cryptocurrency businesses, and financial institutions since 2014. We do not just have the technology and proprietary datasets to deliver insights, but the experience to ensure they are relevant and can be trusted.
Our Market Intel website provides insights to those viewing cryptocurrencies as an investable asset. It provides, currently at no cost, daily metrics on the trading, demand, supply, generation, and risk of cryptocurrencies, as well as daily highlights of the most important changes.
The weekly Market Intel Report, which can be subscribed to on the Market Intel site, summarizes the events and trends on the blockchain that drive cryptocurrency markets. Market Intel will help you understand current trading conditions, how and where in the world cryptocurrency is being used, how much supply is available, and risk levels from illicit activity, among other insights. With this insight, wealth management firms will be able to give customers an evidence-based view on their investment choices.
Trade execution can be offered via institutional accounts on exchanges or brokers. Chainalysis does not offer trade execution services. Instead, we provide transaction monitoring to many of those who do, to control the risk of trade in assets from illicit sources. There are a large number of providers, ranging from cryptocurrency-native firms, such as Gemini, to traditional firms, such as Fidelity Digital Assets, to listed investment products, such as the WisdomTree Bitcoin ETP or the Grayscale Bitcoin Trust.
Once any cryptocurrency has been acquired it needs to be securely stored. Wealth management firms can either custody cryptocurrencies in-house or outsource custody. Ownership is determined by control of a private key, which is similar to a password. But there is no forgotten password reset option. At Chainalysis, we estimate that 20% of available Bitcoin is likely lost, mostly from the early days when Bitcoin was an experiment and many people did not take care to record their private key. Private keys can also be stolen if a hacker gains access to the computer system where they are stored, for example via a phishing attack. It is essential these risks are managed, but they can be well managed, as we describe in our recent guide to security and compliance for cryptocurrency businesses.
A wealth management firm can make the investment in security and technology to offer custody in-house, providing a complete offering to customers, reducing counterparty risk and maintaining margins. Or firms can outsource custody, reducing up-front investment but incurring a fee, and introducing potential brand dilution and counterparty risk. Chainalysis does not offer custody services, but we can help select a partner and provide transaction monitoring software to check the source and destination of funds coming in and out of in-house custody.
Customer interest in cryptocurrencies is likely to increase, given their performance in recent market turbulence and, in particular, Bitcoin’s potential as a store of value in an increasingly uncertain world. Chainalysis can help wealth management firms be informed through our Market Intel offering, providing data for thought leadership and sound investment advice to your customers. We can also help navigate the increasingly mature industry of trade execution and custody providers, so that wealth managers can fulfill customer investment requests. We can also provide transaction monitoring to ensure wealth managers who build their own custody solutions remain compliant.
For more information, visit www.chainalysis.com or reach out to info@chainalysis.com.
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About Chainalysis:
Chainalysis is the blockchain analysis company, providing compliance and investigation software to the world's leading banks, wealth managers, businesses, and governments. Their experts in financial crime and economic analysis empower our customers to derive insights they can act on. Cryptocurrency is a rapidly emerging technology, presenting new challenges to how financial services institutions comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements and ultimately increasing the costs of doing business. Institutions that can identify the cryptocurrency businesses with which their clients are interacting and quantify the risks will be able to take advantage of growth opportunities in these new markets. Backed by Accel, Benchmark, and other leading names in venture capital, Chainalysis builds trust in blockchains.
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