Learning from History: How Investment Institutions Position Themselves in Cryptocurrency Assets

In Fisher's book Paths to Wealth through Common Stocks, he discusses a phenomenon prevalent among institutional investors:

Many institutional investors tend to cluster together to purchase similar investment products, even when these products appear to be very expensive to outsiders, yet they remain "unwavering" in their choices.

I have been paying attention to this phenomenon for a long time. Before reading this book, I simply thought that this was because institutional investors also follow the "herd effect," and many of them lack independent investment thinking.

So I often say they are just retail investors with more money.

However, in this book, Fisher provides a reason that I find more reasonable and straightforward: this is a common tactic for institutional investors to protect themselves, especially to avoid legal troubles.

In the 1950s in the United States, the funds managed by institutional investors typically came from very important trust partners, such as those managing family funds, pensions, and trust funds.

These contributors all have strong backgrounds and resources. Once they believe that the institution managing their funds has made mistakes in the investment process, they can be mercilessly fired or even taken to court. And when these institutions encounter such troubles, regardless of whether they win or lose, they will suffer significant consequences.

Therefore, these institutions will do everything possible to follow what appears to be the "safest" and "most reliable" methods in their processes and operations.

So what are the "safest" and "most reliable" methods?

That is: whatever other institutions have, I will buy; whatever amount other institutions hold, I will hold.

What if the things I bought are wrong? It doesn't matter; everyone else is wrong too.

What if the things I hold drop in value? It doesn't matter; everyone else is dropping too.

If you blame my operating methods, you can ask other institutions; they operate the same way.

You say everyone’s operations are wrong? If everyone is wrong, you won't find an institution that is "operating correctly."

As long as they follow this method, institutional investors are almost safe from risk. As for whether the things they buy are really good or whether their operations are truly correct, that becomes less important.

This book was written in the 1950s, and looking back, I believe that this unspoken rule still prevails among institutional investors today.

Fisher regards this unspoken rule as an important reference indicator for ordinary retail investors during the investment process:

When retail investors are considering an investment target, they might boldly judge: if the target they are investing in is likely to be favored and widely increased by institutional investors in the future, but currently has very few institutional investors involved, then they can confidently enter the market, exchanging time for space and reaping the rewards.

Let’s draw a parallel to today’s crypto assets:

Do we believe that Bitcoin and Ethereum will definitely be favored and widely increased by institutional investors in the future?

Currently, although some institutional investors have already dipped their toes into Bitcoin and Ethereum, what about the majority of institutional investors? Are they still just watching?

I believe every investor will have their own answer to the above questions, and based on their answers, what actions to take will also be self-evident.

Additionally, paralleling Fisher's description of the characteristics of institutional investors entering the stock market, the characteristics of institutional investors entering crypto assets might be as follows:

A small number of institutional investors cautiously begin to experiment with crypto assets. But in the eyes of most institutional investors, they are just "fools."

This small group of institutional investors makes some money from their simple experiments, which makes another group of institutional investors feel tempted, yet still hesitant.

This small group of early entrants unfortunately encounters a market crash, which reassures the previously tempted institutional investors, who continue to call them "fools."

There will always be a small group of early institutional investors who remain persistent, and after several cycles, they actually make a lot of money, prompting another group of institutional investors to finally join in.

As more and more institutional investors enter the crypto asset space, those who were previously indifferent start to look at their allocations and realize they have no crypto assets at all. If asked: why are other institutions investing while you are not? How should they respond? So they also begin to try to allocate some.

Then this trend starts to spread throughout the entire institutional investment circle. Regardless of whether institutional investors truly understand it, crypto assets have effectively become a standard configuration for institutional investors.

By that time, I believe the price of crypto assets will be unimaginable, much like the price of U.S. stocks after the 1950s that Fisher could not have envisioned.