As the value of all cryptocurrencies has surged tenfold this year to more than $170 billion globally, bitcoin is booming and digital currency hedge funds are sprouting at the rate of two a week.
Yet for all the hype, taking the view that it is too lightly regulated, too volatile and too illiquid to risk investing other people’s money in, mainstream institutional investors are steering clear of the nascent market.
Except for 2014, each year since 2011, bitcoin has outperformed all the world’s traditional currencies and it is the biggest and most well-known cryptocurrency.
But many investors still feel that it should be avoided as they see it as an opaque, esoteric instrument used by gun-runners and drug-dealers on the Dark Web.
However, this year, a potential route into the world of digital currencies has been offered to the institutional investors who might be unfamiliar with the market by a flood of new hedge funds focused on cryptocurrencies.
Taking the total to 110 with about $2.2 billion in assets altogether, 84 so-called crypto hedge funds have been launched this year according to Autonomous NEXT, a financial technology research house.
But the world’s pension funds, insurance companies and large mutual funds are staying away because of the fact that most of the funds are relatively small with a limited track record – and cryptocurrency price swings have been so pronounced.
“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), part of the Royal London life insurance company.
“Diversification is a good thing but that doesn’t mean investing in everything just because it’s there. We favor assets with a long track record in producing returns or reducing risks,” said Greetham, who heads RLAM’s multi asset team.
Well below the threshold most institutional investors would consider, there were probably only a couple of funds worth several hundred million dollars with most in the $5 million to $20 million range said Autonomous NEXT partner Lex Sokolin.
“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.
Investing in a basket of hedge funds that includes a crypto fund is one way that mainstream money managers could get exposure. There were no crypto funds in his portfolio, said the head of hedge funds at a major European bank that invests in more than 100 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.”
It is a tricky business – determining the value of bitcoin and other cryptocurrencies. While the total supply is limited to 21 million, and that won’t be reached until the next century, there are almost 17 million bitcoins in existence now.
Bigger than U.S. investment bank Morgan Stanley, bitcoin’s total value, or market capitalization, is close to $100 billion. It was just $15 billion at the start of the year. Ethereum is now worth almost $30 billion and is the second-biggest cryptocurrency.
“If the supply is truly fixed then the price of these securities are determined purely by demand which, in turn, is determined largely by sentiment,” said Ken Dickson, investment director, money markets and FX at Aberdeen Standard Investments.
“This means huge price swings with bubbles, booms and busts. Unless the supply processes of these instruments are reformed then it is unlikely that they will play any part of an investment portfolio,” he said.
(Adapted from Reuters)