Editor's note: It's not often that you get the chance to have a leg up on Wall Street.

But our friend Eric Wade, analyst at our corporate affiliate Stansberry Pacific Research, says that's what we're seeing today.

In today's Masters Series essay, he explains exactly why that's the case in a certain controversial asset class...

This Is Your Advantage Over Institutional Investors

By Eric Wade, editor, Crypto Capital

When it comes to the financial markets, how can an individual compete against the big institutional asset managers who dominate the markets?

These guys have trillions of dollars of assets under management, multimillion-dollar compensation packages for the world's best traders and analysts, and massive budgets for technology and trading systems. And their relationships with investment banks usually give them first pick for a hot IPO and access to all the research that Wall Street has to offer.

It's not often that individual investors get the upper hand on the big institutional asset managers. But there's one frontier asset class where you truly hold the advantage over the bigger guys. And that's in cryptocurrencies.

Let me explain...

Right now, the current total market capitalization of the cryptocurrency space is approximately $132 billion. The global equity market capitalization is around $80 trillion.

So far with cryptocurrencies, institutional investors have been late to the game.

You see, while big institutions have obviously shown a lot of interest in cryptocurrencies as a new financial asset class (it's hard to ignore the massive gains that are possible), they must overcome a lot of hurdles to put some money into cryptocurrencies.

A sovereign wealth fund or endowment manager who wants to buy cryptocurrencies needs to jump through a lot of hoops: all sorts of compliance requirements, legal opinions, and trading guidelines – not to mention the expansion of the scope of the investment mandate (which defines what assets you can invest in).

And there haven't been many "bridges" between traditional asset managers and this new, less-understood arena of cryptocurrencies.

Let's say you're the manager of a sovereign wealth fund and you're interested in making a small allocation to cryptocurrencies. How do you go about it? Do you build an internal team and do it yourself? Unlikely. Instead, you'd be looking for people with strong backgrounds in asset management who have transitioned over to crypto, and who know how to responsibly invest other people's money (i.e. institutional level security, compliance and reporting, etc.).

Some cryptocurrency funds are out there. Many of them are backed by big Silicon Valley venture capital names like Sequoia Capital and Andreessen Horowitz, not traditional institutional asset managers like pension funds, for example.

So the institutional level of participation in cryptocurrencies has been very, very small by any measure... But it's increasing.

In recent months, we've seen several developments that will open up cryptos to the smart money...

For example, in December 2017, bitcoin futures contracts started trading on some of the largest U.S. exchanges (the Chicago Mercantile Exchange and Chicago Board Options Exchange).

Also, Coinbase, one of the largest crypto fiat exchanges, recently launched Coinbase Custody, which is a custodian service for institutional investors. Now, Gemini already has this. Coinbase is adding it. And clearly, this is targeted for institutions. Custody is, of course, one of the major issues that an institution needs to overcome in order to be able to buy bitcoin and enter the space. So having more custodian options for these institutions is a big plus.

And in August 2018, Intercontinental Exchange (ICE) – the company that runs the New York Stock Exchange ("NYSE") – announced it's launching a bitcoin exchange called Bakkt. (It's no accident that the name Bakkt sounds like the English word "backed," which means "supported.") To do it, ICE partnered with tech titan Microsoft (MSFT), coffee chain Starbucks (SBUX), and Boston Consulting Group, a major international consulting firm.

If all goes according to plan, when Bakkt launches, individuals and institutions will be able to buy bitcoin on a platform that's fully regulated by the U.S. government. This isn't just another bitcoin exchange, though. It's a master plan for taking bitcoin from the financial fringes to the very heart of the financial system. It could give bitcoin legitimacy as an investment vehicle – and it could also change the way consumers pay for everything from lattes to televisions.

The exchange itself is straightforward. Bakkt will offer one-day bitcoin futures contracts – agreements that assure buyers will receive the bitcoin they purchase at a set price one day later. They'll then have the option of withdrawing their bitcoin to their own wallets or leaving it "warehoused" (or stored) with Bakkt.

That warehousing might not sound like much, but it's transformational that Bakkt would take over management of each bitcoin wallet's private keys. Those keys, which are vulnerable to hacking and theft, give whoever holds them the ability to access and spend the underlying bitcoin. Bakkt plans to store them "offline" in digital vaults.

This means that suddenly, institutional investment firms – that is, major mutual funds, pension funds, hedge funds, and others with billions of dollars under management – will have a place to buy bitcoin that's as reputable as the NYSE... And they won't have to worry about their private keys.

The same warehouse will likely pave the way for a long-awaited bitcoin exchange-traded fund ("ETF") – an investment vehicle that would give investors the ability to buy bitcoin just like they can buy shares of stock.

Until now, the U.S. Securities and Exchange Commission ("SEC") hasn't been convinced anyone can store bitcoin securely. That's one of the main reasons it keeps rejecting bitcoin ETF applications. If ICE's Bakkt can't convince the agency that it can store cryptocurrency securely, no one can. The NYSE, after all, processes nearly a quarter of all equity transactions in the world. Once an ETF is approved (and I believe Bakkt will be the catalyst for an approval) everyone who can buy shares on a U.S. exchange – including people with Individual Retirement Accounts ("IRA") or 401(k) retirement accounts – will suddenly have the ability to invest in bitcoin with a few clicks of a button.

And that's just the beginning of Bakkt's master plan. Investment banking company Citigroup (C) is also exploring possible crypto American depository receipts ("ADRs"). ADRs are a 100-year-old technology and are issued by a U.S. bank representing a specified number of shares in a foreign stock traded on a U.S. exchange. This is how U.S. investors can easily buy stocks like Chinese retail giant Alibaba (BABA), for example. So you might soon see a bitcoin ADR on the exchange.

Over the next year or so, we're much more likely to see much greater sums of money flow into cryptocurrencies, and bitcoin is likely to be the biggest beneficiary.

The advantage you have as an individual is that right now, you have far fewer hurdles to overcome to put some money into cryptocurrencies than the big institutions do.

A sovereign wealth fund or an endowment manager that wants to buy cryptocurrencies needs to jump through a lot of hoops. But all you really need to do is open a cryptocurrency exchange account and allocate a little bit of money toward bitcoin.

You have the opportunity to "front run" a wall of institutional capital that will likely pour into cryptocurrencies as the asset class becomes increasingly mainstream, and increasingly difficult for asset managers to ignore.

Good investing,

Eric Wade

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