The Serious Money Is Warming to Bitcoin

There’s an arms race afoot over who can store cryptocurrency safest. Perhaps you’d like your bitcoin buried in a vault under a mountain in the Swiss Alps? Xapo has offered that as a service to wealthy investors, for free. Coinbase, best known for its popular cryptocurrency exchange, prefers elaborate key-printing rituals along with a Faraday cage. Anchorage, an Andreessen Horowitz-backed startup, promises easy-access digital storage with some cryptographic voodoo. And now old-school firms like Fidelity and Bakkt, which shares an owner with the New York Stock Exchange, are jumping into the fray with storage solutions of their own.

The aim behind all these sophisticated security arrangements: wooing Wall Street.

A key property of crypto is that it’s proven a pretty dang easy target for thieves. Whether it’s North Korea hammering crypto businesses around the world or an exchange founder absconding with cash, vulnerabilities are abundant. For the crypto industry, that’s not a good look, especially when it comes to institutional investors—pensions and hedge funds and university endowments—for whom there are major consequences when breaches occur. For them, it’s not just a good idea to nail down the furniture, it’s the law.

This week, the still-fringe world of crypto custody saw a spike in activity. Late Thursday, Coinbase’s custody arm purchased the institutional business of rival Xapo for a reported $55 million. The deal wasn’t a surprise, following reports this spring that Coinbase had outbid Fidelity Digital Assets, which started offering custody to clients in March. Then on Friday, Bakkt announced that it had received approval to offer bitcoin futures in September, following months of regulatory delays.

So is crypto the next big thing in institutional investment, or is this fighting over scraps? For now, crypto custody still involves a relatively small pool of money. Coinbase got a boost earlier this month when Grayscale Investments moved its $2.7 billion worth of crypto funds from Xapo to Coinbase, more than doubling the company’s assets under custody. That’s tiny compared with the trillions under management for a company like Fidelity. Custody competitors like Palo Alto, California-based BitGo have reportedly been circling for Xapo’s other clients.

Still, companies like Coinbase and Fidelity think there’s room for growth. In May, Fidelity released a survey of more than 400 institutional investors that found 22 percent already held cryptocurrency, and another quarter saw potential to do so.

The companies point to the recent surge in bitcoin’s price as a sign that investors are warming up to crypto. Fundamentally, nothing has changed since late 2017, when the price of bitcoin spiked to nearly $20,000, driven mainly by hysteria. It’s still backed by nothing and managed by no government; it’s still dominated by a select set of mining pools, based mainly in China. Now, though, there’s a more sophisticated economy being built around crypto, says John Sedunov, a professor of finance at Villanova University. In February, JP Morgan announced it would start a coin of its own. Then in June, Facebook announced its Libra cryptocurrency with the backing of large consumer tech companies like Uber and Spotify. New vehicles like futures contracts offer investors, who might’ve balked at an asset with price shocks that come out of nowhere, more of a buffer.

Another interpretation is that bitcoin is increasingly seen as a way to hedge against uncertainty, notes Sedunov. While volatility means that it’s not a safe harbor, like gold or the Swiss franc, it is a potential hedge when nations take up arms in a global trade war. “There’s uncertainty in where we’re heading, and that makes cryptocurrency more attractive,” he says. The better custody arrangements are another draw, he suggests, making it more appealing for institutional investors who could potentially store hundreds of millions of dollars worth of digital assets.

Perhaps crypto presents a more acceptable store for your money—at least for the time being, and if only to mix things up a bit. For Coinbase, the move is a bid to diversify from its fee-dependent exchange business, which spikes and dives along with the price of digital assets. CEO Brian Armstrong told Fortune Thursday that he hopes to expand the custody business, and potentially extend it into other more bank-like realms, like lending.

But as with anything in crypto, things can change quickly. As recently as April, when the price of bitcoin was less than half what it is now, the prevailing wisdom was that cryptocurrency didn’t have legs among institutional investors. “There’s going to be growth spurts, setbacks, all these things that come with figuring things out,” says Sedunov. “It’s a somewhat fragile ecosystem right now.”

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