Hu Liang, co-founder and CEO of Omniex, is well-versed in the digital payments space and institutional investing. During an interview, he told Cointelegraph that he doesn’t consider the current regulatory landscape to be a barrier for blockchain or crypto investment.
Omniex is an independent institutional investing and trading platform specifically designed for digital assets. The company works alongside exchanges, custodians, and leading institutions for accredited investors to trade cryptocurrencies. Hu reveals that there’s a growing appetite for digital assets in the investment space.
In a conversation with Cointelegraph he explained why that’s the case and how digital payments could evolve in the near future.
Ting Peng: Why are institutional investors interested in the crypto investment space despite regulatory barriers?
Hu Liang: I certainly would not describe the current regulatory landscape as a barrier. Right now, regulators are trying to understand the crypto space. Given the nascency of the market that’s not an easy effort. In fact, the recent OCC announcement in the U.S. that crypto custody services can be offered by traditional banking institutions is a great step forward for all investors.
Institutional investors are interested in crypto for a number of reasons. They’re interested in its high potential as a long term appreciating asset. They’re interested because it’s a great trading vehicle. At the same time, many crypto and digital assets have an actual utility point of view, whether as a form of payment, rail for payment or a vast array of decentralized finance opportunities. Bitcoin, in the span of only a decade, has proved crypto as an asset class has staying power.
“So putting it all together, the opportunities that crypto has already demonstrated coupled with its future possibilities make it an extremely attractive emerging asset for institutional investors of all forms.”
Furthermore, recent global pandemic served to only accelerate the interest. One of crypto’s proven use cases, particularly in the case of Bitcoin, is a store of value. With global quantitative easing as the main monetary policy tool to battle the crisis, many traditional investors are diversifying and hedging their portfolio through crypto. It’s an exciting time and we see regulators working alongside the industry.
TP: What does the average institutional portfolio look like? Are they mostly interested in putting their funds in Bitcoin or a variety of crypto assets?
HL: We have institutional clients of various forms. Just like the portfolios in a well understood market like equities can vary, it’s the same in the crypto world. There are a number of institutional funds out there that only focus on one asset holding, like Bitcoin or Etherum.
In these cases, they are focusing on the long term appreciation potential of the asset and providing a vehicle that makes holding these assets easier for the institutional investor. Holding crypto assets, which are bearer instruments, is not easy in terms of custody and security. So having a vehicle like the Grayscale Investment Trust is a straightforward way for regulated institutions to get access to crypto assets.
But the majority of crypto portfolios have more than one asset. Some are focused on large cap tokens, while others focus on smaller tokens and many focus on a broad scale weighed by different risk factors. It’s also important to understand there are different styles beyond just assets holdings.
A portfolio can have, say five holdings, but can behave very differently from another portfolio with the same five holdings depending on trading style or strategy. One strategy can hold these assets constantly for weeks, months or even longer. Others could adjust holding rations weekly or daily.
TP: Some still argue that the Game Theory model still applies in Bitcoin trading, causing market manipulation, does this prevent institutional investors from entering the crypto space?
HL: There are a lot of trading models and strategies out there. They apply equally to fixed income, equities, FX and crypto. The fact that one asset is being traded by a few institutions isn’t an issue. That is something of a daily event on the equities market in penny stocks, small caps and large caps too.
“If you know how the market is behaving, then you shouldn’t be surprised. Use the right model and method to attack and defend. So I don’t think this is a barrier to entry. Volatility is part of the expected nature of investing and trading.”
The market size is too small for some large investors. If a pension fund with $100B in assets decides to allocate 0.5% to BTC, that’s $500M. Trading a block of that size is not easy. You can do it today and Omniex can help, but in traditional markets, it can be done in the blink of an eye. In the crypto world, you have to take care not to move the market and actually source the liquidity. It’s the fact that the investment process isn’t the same yet compared to traditional assets that’s keeping many clients out.
TP: Is crypto volatility good or bad for investors?
HL: Volatility is always good and bad, depending on who you ask. From a long term investor's point of view, volatility should be considered an innate part of the investing experience that does not affect the overall macro theme of the investment.
Any market has bump along the way. So if you believe in the macro thesis of the value of crypto assets and the potential utility it can bring via decentralized finance, then volatility is just a local phenomenon and long term outlook is all the same. It really has no effect in the long term.
“For short term investors, volatility is great. Traders live on volatility. If there is no volatility, like the current rates market, then there is no game. So the fact that crypto is a volatile market is a good thing for traders.”
But we don’t want constant volatility. Volatility means uncertainty, so as crypto assets continue to mature, we would expect it to reduce. This reduction in volatility over time is what will help a lot of large, long term institutional investors get into this asset class.
Even if the long term outlook for crypto is positive, short term volatility causes havoc on portfolio valuation and drawdown, making it difficult for larger institutional investors to add crypto to a portfolio that requires predictability, like pensions and insurance. Volatility is expected for a new asset and when we understand it, volatility can be easily managed.
TP: How would governments globally adapt to the fact that crypto is here to stay?
HL: Governments are already adapting to digital assets. We see regulatory related announcements almost daily from all regions around the world. And when we say crypto, we should look at crypto and the underlying blockchain technology as well. Both are being reviewed, analyzed and adopted.
Many governments, including US, England, China, Switzerland, Singapore and a number of others have all put out statements around the concept of Central Bank Digital Currency and other forms of payment networks utilizing blockchain technology.
“But what’s more important to global adoption is a globally coordinated effort rather than local efforts — this is much more challenging. Of course, this is made more difficult today with the pandemic, but we’ll start seeing cross border efforts starting soon and real use cases implemented in the near future.”
TP: Do you have any insights you’d like to share on the future of digital payments?
HL: My vision is simple: the future of digital payments is bright. And it will come in various forms. One can argue that payments are already digital. Personally, I no longer carry cash and have not written a check in ages.
In the foreseeable future, my view is that digital payments will exist in three forms. In the first form, it’s simply a digitization of the existing system, which is what all of us are already doing. It’s a layer on traditional finance that simply makes our lives easier.
In the second, emerging form, fintech and traditional tech will merge and combine to create a new infrastructure. Combine that with data & analytics with machine learning, we get new use cases that are truly unique and can only exist post the Internet age.
The third form is true digitalization. This requires institutions, new and old, plus central bank infrastructures to be on a true digital platform. The concept of CBDC needs to become a reality. This last form is one major reason why crypto and digital assets are so exciting.
This interview was edited and shortened for clarity.