With no regulated market infrastructure for cryptocurrencies, most institutional investors have avoided them, concerned about security, volatility and how to value the rapidly growing universe of digital coins and tokens.
The US Securities and Exchange Commission echoed those concerns when it rejected several applications for bitcoin exchange-traded funds (ETFs) in 2018, citing worries about market manipulation and investor protection.
Nevertheless, a lot of institutional investors think cryptocurrencies have longterm potential. A report by research firm Greenwich Associates in September found that 72% of institutional finance executives believe cryptocurrencies will have a place in the industry’s future. As of June 24, the price of bitcoin, the largest cryptocurrency by market capitalization, had rebounded to just shy of $11,000, more than three times above its December lows as volatility has re-entered the market this year.
Tom Shaughnessy, who founded the institutional research firm Delphi Digital, thinks that cryptocurrencies potentially could become a core alternative asset in traditional institutional portfolios.
“Funds have done studies that found if they had put one percent of their money in crypto over the last 10 years, their return would have been much higher,” he says.
Some big institutional investors are already testing the water. Yale University is one of several endowments that invested in cryptocurrencies last year, reportedly buying into two cryptocurrency funds: a $300 million fund from venture capital firm Andreessen Horowitz and a $400 million one at Paradigm, a fund from Coinbase co-founder Fred Ehrsam and former Sequoia Capital partner Matt Huang.
In February, Morgan Creek Digital Assets, an affiliate of investment manager Morgan Creek Capital Management, announced that two pension funds in Fairfax County, Va., are anchor investors in a new $40 million venture capital fund that will invest in companies in the blockchain and digital assets industry, with a small allocation to cryptocurrencies.
These traditional institutional funds are joining the hedge fund, venture capital and private equity pioneers, which according to a recent Morgan Stanley report, held cryptocurrency funds totaling $7.11 billion by July last year.
To date, most of these investments have been tiny, in part because of the dearth of a global regulatory framework for cryptocurrencies. Individual and institutional clients with significant positions often have to resort to the phone to unload their portfolios, because prices are fragmented across multiple trading venues.
“There are certainly more institutional investors moving into the space, but it’s very early stage,” says Scott Canning, a research analyst at Mellon Investments Corp., a unit of BNY Mellon. Some endowments, for example, are carving out very small portions of their investment portfolios to gain exposure to the low probability chance of huge upside, he says.
There are a few different reasons: “Some see this as a scarce digital asset, some are interested in the underlying technology, some want an uncorrelated asset and have decided that adding a little bit of crypto to their portfolios may improve their risk-adjusted returns,” says Tom Jessop, head of Fidelity Digital Assets, a venture formed last year by $7.3 trillion asset manager Fidelity Investments.
Big banks are stepping forward with new infrastructure solutions for the institutional marketplace. In one example, a consortium of 14 firms including BNY Mellon have invested in a project called “Utility Settlement Coin” to enable instantaneous settlement of tokenized fiat currency on the blockchain.