Institutional Investors Still Wary of Bitcoin
Bitcoin prices break records, but large institutional investors are still cautious. The market is still more volatile and less liquid compared to older asset classes and rule-bound investors cannot buy in yet.
The market capitalization of Bitcoin has settled around $100 billion- the valuation of some of the largest corporations based on their stock price. But Bitcoin for now does not attract money from large institutional investors.
Institutional investors, burdened with the responsibility of other people's money, refuse to invest them in what they see as a very volatile, unregulated market. On top of that, trading volumes between $1.5 billion and $3 billion per day are actually quite small by the standards of institutional investors. To compare, the stocks of just one company, Apple (AAPL) have reached peaks in trading at $30 billion per day and trading is much more active than Bitcoin and the entire altcoin market combined.
"For many institutional, discretionary fund managers, those funds wouldn’t get cleared because the big question would be around liquidity," said James Butterfill, head of investment strategy at ETF Securities in London.
This does not underline the intrinsic lack of value of the market, but simply its novelty. For now, cryptocurrencies remain outside the scope of non-technical buyers and require more understanding to invest confidently.
Institutional investors would not go on to buy crypto assets directly- they would invest through a hedge fund or other derivative vehicles such as ETNs. And this is what crypto-based funds are hoping for, to attract money from institutional investors by offering a mainstream product instead of direct ownership of Bitcoin or altcoins.
"While cryptocurrencies are probably here to stay, they are difficult to analyze, wildly volatile and some may be prone to fraud," said Trevor Greetham at Royal London Asset Management (RLAM) for Reuters.
An unnamed European investment banker spoke of crypto-based hedge funds:
"It’s a very controversial proposition," said the banker, who declined to be named. "It’s unlikely that the most established hedge funds will make big bets on this because you could put your core business at risk."
Institutional investment funds have strict rules on the level of volatility in a portfolio. And while cryptocurrency traders are used to large daily swings up or down, these numbers do not match the standards of traditional investments.
According to experts, the profile of a crypto investor includes high net worth individuals, private wealth investors and other entities willing to take up risk without restrictions. But in the future, a few decades may bring cryptocurrencies into the mainstream.
Hedge funds are considered old-school now, but in the 1990s, they were on the cutting edge of finance and the first clients they attracted were high net worth individuals. Alistair Milne, co-founder of the Mayfair-based Altana Digital Currency Fund, said:
"It always starts with the high-net worth individuals," he said. "It wasn’t until 2004-2005 that institutional investors started getting involved in those."
By that time frame, investing in Bitcoin and crypto assets would become mainstream in another 15 years- but maybe less, as the sector develops very fast and reaches a lot of consumers directly.
Even now, dozens of hedge funds based on cryptocurrencies are open for business- believing that the cryptocurrency market holds just the right amount of volatility to support their complex asset-picking strategies.