What is BlackRock? When Financial Giants Get Into Crypto
Description of What is BlackRock? When Financial Giants Get Into Crypto
On August 11, BlackRock announced that it would offer Bitcoin spot investment services to its customers through Coinbase. As a company managing trillions of dollars in assets, what will be the impact on the crypto market? Let's find out in the article.
Core knowledge:
- BlackRock is a leading global asset management company with profound influence in the financial and political worlds.
- The size of BlackRock's assets under management is estimated at $8.5 trillion (data updated to Q2 2022). Peaking at over $10 trillion in 2021.
- BlackRock aims to build long-term financial solutions for customers, focusing on organizations and individuals with high net worth.
- On August 11, BlackRock announced that it will provide customers with access to Bitcoin spot through Coinbase exchange.
- This news has created a positive effect in the short term and accordingly many expectations of billions of dollars will be allocated to crypto by BlackRock in a short time.
- However, based on comparable estimates and some other data suggests that the actual number may be much lower than expected.
- But we can expect BlackRock's entry into the crypto market to bring positive long-term effects on many aspects such as cash flow and regulatory.
What is BlackRock?
BlackRock is an American global asset management company headquartered in New York City. In general, BlackRock provides solutions for portfolio management, risk management and many other financial advisory services to clients on a global scale.
At the end of 2021, BlackRock manages over $10 trillion in assets. Equities and fixed income assets are the two asset classes that make up the majority of a company's management portfolio.
The average growth rate of assets under management or AUM (Assets under management) since 2006 has averaged 17.3%. Proving that BlackRock's portfolio management solutions achieve certain effects and gain the trust of customers.
When compared to the GDP of the US, the world's leading economy, BlackRock's AUM is worth nearly 50% of total GDP in 2021. This is the data so we can get an overview of the size. and its influence on the financial markets in general.
Development history
Established in 1988, experienced over 30 years of development in the asset management industry. BlackRock is a company with a rich history and experience in the financial markets.
Some notable milestones in the company's development history include:
- 1988: Established the company.
- 1999: Began to share its proprietary technology, Aladdin, a technology platform to assist in the process of risk management. Currently, Aladdin is used by many different companies, the total amount of assets managed through this platform is more than 20 trillion USD.
- 1999: Also in 1999, on October 1st, BlackRock listed company shares on the New York Stock Exchange. At that time, BlackRock had an AUM of $165 billion.
- 2009: Acquiring Barclay's Global Investors (BGI), becoming the largest asset manager in the world, BlackRock's AUM that year skyrocketed 156% from $1,307 billion to $3.346 billion.
- 2012: Launch of iShare, offering ETF products. AUM growth rate from 2012 to 2021 is ~12%.
- 2018: Established an AI research lab in Palo Alto with the aim of using high-tech tools such as artificial intelligence, techniques such as machine learning, data science, etc. to optimize customer profits.
- 2019: Launch of BlackRock Retirement Solutions Group, a lifetime financial solution. Acquired eFront, one of the leading platforms providing alternative investment solutions.
Through the development history of BlackRock, we can draw a few things:
- The company focuses on building and developing more in the asset management industry. There are currently no signs of expanding into other financial sectors.
- Through the establishment of index funds (which provide cost and tax benefits), retirement financial plans, wealth management, etc., it can be seen that BlackRock's goals are often directed towards to bring benefits to customers in the long term.
- Besides, the company also takes steps to keep up with technology trends when researching tools such as artificial intelligence to improve investment performance.
- Due to the management of a large amount of assets, BlackRock always has to find new investment opportunities with high returns to improve performance. Accordingly, crypto is now in their sights.
Overview of BlackRock's operating model
BlackRock has a business model that generates revenue from fees for its services including:
- Fund management fee as well as performance fee (partially collected from customers)
- Financial consulting fee
- Technology service delivery fee (via Aladdin)
- Securities lending fee
- Other fees
Thus AUM is directly related to BlackRock's revenue. In short, the bigger the AUM, the better the performance, the more profitable BlackRock will be.
Up to now, BlackRock has released thousands of different fund products serving clients on a global scale.
BlackRock's business model in general is not much different from other asset management companies. BlackRock's competitive advantage lies in its technology, governance methods (through Aladdin), longstanding reputation and deep connections and influence in the political world.
BlackRock's business situation
Before getting into the facts regarding how BlackRock has approached crypto, we need to analyze a few points about the company's business to determine:
- Customer structure
- Revenue structure
- What are the assets currently allocated by the fund?
Thereby as the basis for related projections on the move to enter the crypto market.
Regarding customer structure, in BlackRock's Q2 2022 report, based on AUM:
- 57% of BlackRock's AUM belongs to institutional investors.
- 10% belongs to individual investors.
- The remaining 33% are corporate ETFs.
In which, if based on the amount of fees collected:
- 30% belongs to institutional investors.
- 31% belonged to individual investors.
- 39% are ETFs.
Thus, it can be seen that BlackRock's individual investors only account for 10% of the AUM but contribute 31% of the fees collected. Therefore, we can make a prediction that these are individual investors with large net worth.
In general, in terms of customer structure, BlackRock will tend to focus on the following segments:
- Mainly institutional and high net worth individual customers.
- Small individual customers will often be provided with services by the company directly through ETFs or indirectly through the organization.
In terms of revenue structure, in Q2 2022, revenue from basic fees (fund management fees) still accounted for the majority (78% of total revenue). As a result, BlackRock's revenue is highly dependent on the size of the AUM.
In terms of asset structure, BlackRock mainly allocates capital to stocks (usually more than 50%), about 30% to bonds. According to the data of the past 12 years, this structure has not changed too significantly.
Multi Asset and Alternatives will usually account for about 10%, the rest is mostly Cash Management. And this rate from 2010 to 2022 has not changed much.
It seems that BlackRock always has a certain capital allocation target for each different asset class. After changes in the ratio of asset classes in AUM (due to price fluctuations), the company will restructure its portfolio to achieve the above goal.
How is BlackRock moving towards crypto?
Access through Coinbase
On August 11, BlackRock announced that it would enter the crypto market through the establishment of a Bitcoin (Private Bitcoin Trust) fund for institutional investors.
The exchange that BlackRock chooses to conduct crypto transactions is Coinbase. Earlier on August 3, Coinbase also announced that it will provide related services to BlackRock customers.
There are two notable points to this news include:
- BlackRock's Bitcoin Private Trust Fund will give its clients access to Bitcoin spot. This means that the transactions will directly affect the price as well as the money will flow directly into the market.
- Coinbase is the name of choice. As analyzed above, BlackRock is a company that tends to provide financial solutions in the long term, so Coinbase in the long term if still trusted by BlackRock will receive many benefits.
Learn more: Coinbase Complete
Although before that, BlackRock has given not very positive views on crypto. In 2017, Larry Fink, the company's CEO, called Bitcoin the "index of money laundering" a symbol of money laundering, meaning that prices and activities on the Bitcoin network are cryptographically correlated. associated with money laundering.
However, with the above moves we can see that:
- The market and customer demand of BlackRock is strong enough for them to change their mind and provide related services.
- Or chances are that BlackRock sees the long-term growth potential of the crypto market, as it is an organization that is geared towards long-term financial benefits for its clients.
After this news broke, there was a lot of optimism about the future of the market and predictions about what percentage of BlackRock's current massive AUM volume would be allocated by the company to the market. crypto.
Some expected numbers such as 1% or 5% have been given (equivalent to about 85 billion or 425 billion USD). So is there really a possibility for that? We will find out in the following section.
Will the impact from BlackRock in the short term be significant?
To roughly determine BlackRock's capital allocation to Bitcoin, a capitalization-based equivalence approach to assets such as stocks, technology stocks, and gold will be applied in the article.
Currently, BlackRock approaches crypto through offering Bitcoin investment services. Bitcoin has a high correlation to stocks, so we will first compare with this asset class.
According to data released by BlackRock (updated until the end of Q2 2022), BlackRock's AUM is about $8.5 trillion. In which, shares account for about 51%, equivalent to about $ 4.328 billion.
Relatively comparing the market cap of around $409.3 billion (Coinmarketcap, Aug 24, 2022) of Bitcoin and $84.387 billion of global equities (source: companiesmarketcap), the allocation to crypto would represent 0.25% of the AUM of BlackRock (equivalent to 21 billion USD).
However, Bitcoin is now often compared by investors in the traditional financial markets to technology stocks due to its high correlation.
Therefore, we will continue to compare with BlackRock's capital allocation to technology stocks to estimate the potential capital allocation to the crypto market. According to data collected from BlackRock's Website, with the keyword "Technology" in the US region, we will get 11 results about technology stock investment funds.
The total AUM of the above funds is $13.4 billion, representing 0.16% of BlackRock's total AUM. When compared with the market capitalization of technology stocks (in the US) of 15,118 billion USD (source: companiesmarketcap), we will get the result that BlackRock's allocation for Bitcoin will be about 890 million USD.
When compared to gold, with a similar filter for the keyword "Gold" in the US region. The result was 4 gold-related investment funds with a total AUM of 29.4 billion USD, accounting for 0.35% of BlackRock's total AUM.
With a gold capitalization of $11.635 billion, we would have BlackRock's capital allocation (when compared to gold) of BlackRock to Bitcoin would be $1.03 billion, or 0.01% AUM.
If we take the average of the gold and tech stocks equivalent, we get an estimated $961.7 million in Bitcoin.
Another point to note is that currently BlackRock only offers this product to institutions. As of Q2 2022, institutions account for 57% of BlackRock's total AUM. Therefore, the above figure will be adjusted accordingly.
⇒ Accordingly, 57% of $961.7 million will correspond to $548 million, which is an estimate of the volume of capital that will flow into Bitcoin from BlackRock when compared to gold and tech stocks.
In addition, we have not evaluated other criteria such as risk level, profit expectation, liquidity, market demand, etc., so the above figure is for reference only.
Besides, the current correlation level of Bitcoin and stocks and gold is currently quite high. According to The Block, Bitcoin's correlation (30-day average) with gold and equities is currently above 0.6.
This is a pretty high number. Add to that the riskiness of Bitcoin compared to the above assets, which will affect BlackRock's AUM allocation decision as it is an asset management company with a wide range of quantification methods and capital allocation levels. high in stocks.
Summary:
- If compared with the capitalization of gold or technology stocks (excluding other factors), BlackRock's capital allocation to Bitcoin will be 548 million USD (based on the numbers in the US market, the US market, the US market, etc.) BlackRock's primary school).
- There are many other factors that can affect this number such as liquidity, customer demand, level of risk and return, etc.
How will the crypto market behave?
Thus, in the short term, we still cannot expect many billions of dollars to be poured into the market through BlackRock.
However, if the figure of 548 million USD is spent by institutions to buy Bitcoin in the near future, how will the price fluctuate?
In the case if they buy directly on the Coinbase exchange, this is more likely to happen because BlackRock has partnered with Coinbase to provide services related to buying, selling and storing Bitcoins for its customers.
Looking at Coinbase's current depth of liquidity, a market buy with a volume of about $10.4 million would cause the exchange's price to move up 2%.
With a 10% volatility, just $31.52 million is needed, according to data from coinpaprika.
Therefore, the buying volume of more than 500 million USD above, if placing a market buy order, will make the price fluctuate greatly. And of course, that won't happen due to the high level of slippage. In fact, with such a large volume, they were forced to split it dozens of times to avoid slippage as much as possible.
According to liquidity depth data, if BlackRock pours hundreds of millions of dollars into Bitcoin in a short time, it will have a positive effect on price growth.
Besides the demand from BlackRock, this will also create FOMO for individual investors. Let's take a look at the events related to Tesla's Bitcoin buying and selling for a rough assessment of these impacts:
- In February 2021, Tesla announced it had bought $1.5 billion worth of Bitcoin.
- After that, Elon Musk made many announcements about accepting Bitcoin or Dogecoin as a means of payment for his services.
- Elon Musk's crypto "shill" moves have contributed to the growth of the market in general and coin memes in particular. Price
- In the last Q2 2022 financial report, Tesla showed a move to sell 75% of its Bitcoins for $936 million.
Currently, Tesla is holding around 10,800 BTC (according to Bitcointreasuries ), which means that in Q2 2022, Tesla sold 75% of its Bitcoin holdings at around $30,000.
Elon Musk's buying and selling activities or Twitter moves have caused the price to have a large pump dump. Many people also believe that the reason why the market had chain collapses from Three Arrows Capital, Celsius, etc. was due to Tesla selling Bitcoin.
With BlackRock, it is possible that the short-term impacts will not be as large as Tesla's on the following grounds:
- Market sentiment at the time Tesla bought Bitcoin was very positive.
- BlackRock likely won't be as active on Twitter as Elon Musk.
- Based on the above estimate, BlackRock's buying power will also be about 3 times lower than Tesla's.
- There is still a positive point that it is likely that BlackRock will buy Bitcoin through the Coinbase exchange, which will create a buying force that directly affects the price, which Tesla (probably) did not do when many people at the time. claim that they bought $1.5 billion worth of Bitcoin via OTC.
BlackRock is a large organization with financial and political influence, so the positive effects will be of a different nature than Tesla. One example can be mentioned as the political impact that will promote the right regulatory frameworks that facilitate the development of crypto in the long term.
Consequences that BlackRock can bring to crypto
Consolidation for the long-term development of the market
In the long term, we can fully expect BlackRock to expand investment products not only limited to Bitcoin but the entire crypto market. Customers who have access to this product will also be extended to individual customers.
As the historical data analyzed above, since the launch of iShare ETF products, BlackRock's AUM has experienced significant growth. Therefore, we can expect a similar strategy to be applied to BlackRock's crypto-related products, launching crypto-related ETFs.
As a wealth manager with the goal of building a lifetime financial plan for clients. Most likely, BlackRock's participation will spur pension funds to allocate capital into the crypto market.
BlackRock's annual report also mentions that the majority of the assets of the institutions they manage belong to pension funds. As of the end of 2021, this represents 65% of the total AUM of organizations managed by BlackRock.
As of Q1 2022, pension funds hold total assets of $27.213 billion (more than 3 times BlackRock's AUM).
Besides, some studies show that pension funds own up to 20% of the stock market in the US.
Thus, pension funds contribute significantly to the growth of the stock market in the US due to characteristics such as:
- There are tax incentives
- Money flows in steadily
- Long-term investment period
Therefore, if Bitcoin or crypto were to be added to the pension funds portfolio, it would be the driver of growth in the long term.
Legal issues will be cleared up
In addition to influence in the financial sector, BlackRock also possesses a resource to be able to influence politicians and lawmakers, especially in the US market.
Some of the characters that have been recruited by BlackRock can be mentioned:
- Brian Deese: Former senior advisor to former President Barack Obama and deputy director of the National Economic Council.
- Wally Adeyemo: Was nominated to be the deputy secretary of the US Treasury during the Biden presidency. Before that, he worked for President Obama's economic consulting team.
- Thomas Donilon: Served as national security adviser under President Obama.
- Dalia Blass: A longtime former official of the US Securities and Exchange Commission (SEC), runs the investment management division.
- Coryann Stefansson: Previously worked on banking supervision issues at the Federal Reserve and held senior positions at the New York Federal Reserve.
The above information was obtained via Business Insider .
Besides, BlackRock also plays a supporting role for the Fed in some policy decisions.
It can be seen that the impact on the political world of BlackRock is not small.
Therefore, if the company intends to expand its crypto-related investment products such as adding to its portfolio of pension funds or developing spot ETF products to reach more customers, it would be a great investment. positive news.
Accordingly, under his influence, it is likely that the above issues will be easier to pass, serving the long-term growth of the crypto market.
Crypto will be more related to stocks
Although we can expect positive scenarios such as: Crypto will have a long-term inflow of money, regulatory frameworks for growth are introduced, etc., but we also need to look at some systems. results can happen.
With the participation of BlackRock, it is likely that crypto will have a similar price movement to the stock market. Since BlackRock is a traditional financial company, the previous investment models and theories will be applied to crypto investments.
And ultimately under BlackRock's huge capital will lead to a consequence that crypto will be able to behave like stocks, and fluctuate according to the monetary policy of central banks.
Despite having a great deal of political influence, BlackRock cannot completely control the government. If crypto investment products are widely available, issues such as KYC, stablecoins or anti-money laundering will continue to be regulated by lawmakers in the future.
This will most likely continue to affect crypto's decentralization (especially seen through the Tornado Cash event).
Conclusion
BlackRock is a leading global asset management company with extensive experience and high reputation in the asset management industry. The exposure to crypto shows that the company sees long-term growth potential for this market.
However, based on relative estimates, we cannot expect multi-billion dollar cash flow into the market in a short time. But based on the above analysis, it is likely that the long-term benefits that BlackRock brings will be significant.
