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Welcome to the On the Margin Newsletter, brought to you by Ben Strack and Casey Wagner. Here’s what you’ll find in today’s edition:

• How the historical “reputation risk” for advisers and institutions allocating to crypto has, in some ways, inverted. 

• NVIDIA is about to drop its Q2 results. Here’s what to know beforehand. 

• What to make of Russia’s crypto-related tests, set to start in the coming days.

More institutions viewing digital assets as ‘inevitable’

There used to be “reputation risk” for financial advisers and institutions allocating to the mysterious crypto segment.

That has changed as regulatory developments (and in turn, tools to gain access to the category) continue to proliferate. 

“What we’ve seen now with the spot bitcoin and spot ethereum ETFs is that risk, in a lot of ways, has inverted,” said Grayscale Investments managing director John Hoffman. “Investors now see they have potential career risk and reputation risk if they have not done the work on this asset class.”

The reason for this? Hoffman told Blockworks: “Their clients are asking them about this space now in a much more pronounced way than we’ve ever seen before.”

This matches up with a collection of surveys and executive commentary bundled into a Wednesday OKX report. The findings reflect sentiments from a Dubai roundtable discussion hosted by the crypto exchange in Q2. 

Asset management and banking customers seeking out this exposure coincides with institutional recognition that crypto assets have low correlation to equities and fixed income —  making them a good portfolio diversifier. 

Crypto can act like other commodities (namely gold), serving as a hedge against inflation, Capmetric chief executive Rams Kanouni notes in the report. Many perceive stablecoins as alternatives to cash.

Regulatory disclosures this year have indicated that institutions — from hedge funds and RIAs, to the state of Wisconsin — are holding bitcoin ETFs. 

Hunting Hill Global Capital added exposure to the BlackRock and Bitwise BTC funds in Q2. Founder Adam Guren told Blockworks that crypto not only offers high return potential, but can also counter traditional market volatility and unlock greater portfolio diversification.

Decisions to increase or decrease the firm’s holdings will hinge on market liquidity, political tailwinds for crypto products and opportunities for strategic ETF trades, he added. Hunting Hill’s evaluation of crypto credit markets will also be crucial to such assessments.

OKX cites a survey that institutional investors expect crypto holdings to make up 7.2% of their portfolios by 2027. Guren noted that current crypto allocations typically span from 1% (conservative) to as high as 10% — a range consistent with financial advisers I spoke with a few months back.

Others who are less interested in specific crypto assets may wait for the real-world assets tokenization boom. 

About a third of hedge funds labeled tokenization as the most significant future market opportunity in a 2023 survey. Financial titans BlackRock and Franklin Templeton already offer tokenized money market funds, while others like State Street also look to make a splash in the segment. 

“What’s clear is that institutions see digital assets as inevitable, as…securities, bonds and central bank digital currencies are tokenized on the blockchain,” OKX chief commercial officer Lennix Lai told Blockworks. 

An additional point made “forcefully” throughout the roundtable, he added, was that more regulatory clarity will be critical for further institutional adoption. 

Citi Services’ Jagadeshwaran Kothandapani posed, for example, whether fiat currencies operating as tokens on distributed ledger technologies are deemed as currencies (for regulatory purposes), or as assets. 

Then there’s the timeline to consider. Lai said he was struck by participants' confidence in the speed and scale of this revolution.

SkyBridge Capital founder Anthony Scaramucci is quoted in the report as saying mainstream consumers will “seamlessly” be transacting on blockchains in the next 10 years, without realizing it. 

Many seem to be on the same page. Now, it all just has to keep unfolding.

— Ben Strack

The number of consecutive trading days the US spot ether ETF segment has tallied net outflows. The investor capital has mainly exited the higher-priced Grayscale Ethereum Trust (ETHE), while competing products have not been able to fully offset the leakage.    

Bitcoin funds in the US have avoided this type of streak, seeing net inflows during eight of the last nine days. The highest outflow run for the spot BTC segment was seven days (occurring twice, in April and June).  

Further education about Ethereum — particularly among financial advisers and institutional investors — is likely to be a flow catalyst coming out of the summer doldrums, and beyond.

Blockworks Research is conducting a survey to gain insight into the institutional staking landscape. This data will help industry leaders adopt their strategies as the industry matures.

If you're an institutional staker, we want to hear from you (and if you’re new to Blockworks Research, get 20% off of our service while you’re at it!)

A major economic data point drops this afternoon after the close: NVIDIA Q2 results. 

NVIDIA so far has been the major winner of the AI boom. Shares are up 158% year to date and up close to 2,900% over the past five years. 

Analysts are calling it the most important stock in the world. NVIDIA’s earnings today are either going to solidify or undermine the AI narrative markets seem to love so much. Given that it’s now more than 6% of the S&P 500, its earnings are going to have a ripple effect on tech stocks and beyond. 

No pressure, right? 

NVIDIA’s revenue has shown triple-digit growth over the past three quarters, and analysts are expecting today’s report to be no different. Expectations call for revenue to show a 112% increase during the past quarter, which would be a slower pace than the company’s performance earlier in the year. 

The key figures to listen for on today’s earnings call will be what execs are forecasting for next quarter. Demand to build out AI capabilities will be crucial for sustained growth. 

“Good news feels baked in; bad news, not yet,” Noelle Acheson, author of Crypto is Macro Now, said of NVIDIA’s earnings impact. 

Markets seem to have relatively recovered from their decline driven by Japanese interest rate and US job market woes earlier this summer. NVDA shares were trading at roughly $124 at 2 pm ET Wednesday — down from a high of about $136 in July.

Good luck to NVDA holders. Or really I should say: Good luck to anyone that holds anything.

— Casey Wagner

Russia is poised to start testing out crypto exchanges and cross-border crypto payments, Bloomberg reported this week. The move comes after a slew of international sanctions have made it difficult for Russian businesses and entities to facilitate payments. 

The country’s trials for such systems are reportedly set to begin on Sept. 1.

US officials in June announced greater restrictions on foreign banks and entities helping Russian businesses settle payments for exports. 

The following month, Russia’s parliament passed bills to legalize crypto mining and pave the way for crypto cross-border payment testing under the country’s central bank. Putin signed the bills into law a few weeks ago.

OFAC, which oversees sanctions in the US, “takes the view that its sanctions apply to activity conducted in cryptocurrency,” according to Steptoe & Johnson attorney Evan Abrams.

Still, concerns around how and if Russian entities could use cryptocurrencies to evade sanctions imposed by the US and other countries swirled in 2022 as regulators across the world tried to isolate the country from the global financial system. 

Russia’s latest move into the crypto space has other implications beyond potential sanctions evasion, industry experts say.

“America has a choice,” CoinFund President Chris Perkins told Blockworks. “It can allow its adversaries, like Russia, to lead in their adoption of emerging technology, like crypto payments. Or it can pass principles-based stablecoin policies that improve the system and enhance national security.”

— Casey Wagner

Digital assets have taken a prominent seat in the world of macroeconomic analysis.

Hear from some of the world's largest funds and asset managers at Permissionless on how they view digital assets through the lens of macro.

• OpenSea became the latest company to receive a Wells notice from the SEC. CEO Devin Finzer said the agency believes NFTs on OpenSea are securities, while noting that the marketplace is “ready to stand up and fight.” 

• Bitcoin’s price briefly dropped below $58,000 mid-day Wednesday before bouncing back up to $58,690 by 2 pm ET. Ether had dropped to roughly $2,460 earlier before rebounding to $2,500.

• Speaking of crypto prices, XBTO Global CEO Philippe Bekhazi said recent drops could be attributed in part to the arrest of Telegram co-founder Pavel Durov. “Telegram is home to many crypto discussions and deals, and as we don't yet know the extent of the crackdown, there is some fear and nervousness across the community,” Bekhazi said in an email. French police released Durov from custody and transferred him to court for questioning, CNN reported Wednesday.