Bitcoin is becoming prosperous and digital currencies are emerging on weekly basis, this makesthe value of cryptocurrencies to increase at an exceptional rate this year to more than $170 billion.
However, with all these hype most of the institutional investors are not investing in this market because they think it is not well regulated, very volatile and illiquid which make it inappropriate to risk other people’s money in.
Bitcoin which is the biggest and well-known cryptocurrency performed better than all other currencies in the world since the year 2011, with the exception of 2014. But with thisperformance, most investors still see it as an opaque, esoteric instrument which is being used by gun-runners and drug-dealers for various kinds of illegal activities.
Although some of the hedge funds have concentrated on cryptocurrencies this year and they haveprovided a route to digital currencies for institutional investors who are not familiar with the market.
The report given by Autonomous NEXT which does various research on financial technology shows that 84 crypto hedge funds have been launched this year resulting to a total of 110 with about $2.2 billion in assets altogether.
Majority of the funds are very small and does not have a good tracking record. The price swing of cryptocurrency have been well pronounced which means that the world’s pension funds, insurance companies as well as large mutual funds are not taking it into consideration.
Trevor Greetham said that cryptocurrencies are probably here to stay but are very difficult to analyze, wildly volatile and may be prone to fraud. He said this at the Royal London Asset Management (RLAM), which is part of the Royal London life insurance company.
Greethan who is the head of RLAM’s multi asset team said that diversification is a good thing but it does not mean that we should invest in everything because we have the opportunity. Assets with long term record are being favored in reducing risks or producing returns.
Lex Soklin who is an Autonomous NEXT partner said that only few funds worth several hundred million dollars while most fall within the range of $5 million and $20 million and this is not up to the threshold which would be considered by most institutional investor.
James Butterfill who is the head of investment strategy at ETF Securities in London said that for many institutional, discretionary fund managers, they won’t be able to clear those funds because of liquidity.
‘Bubbles, booms and busts’
The only way by which a money manager can be exposed is by investing in many hedge funds which include a crypto fund. However, the head of hedge fund at a major European bank that has investment in more than 100 hedge funds said that there were no crypto funds in his portfolio.
An anonymous bank said that it is a very controversial proposition and there is no likelihood that most of the well-established hedge funds will make big bets due to the fact that you could put your main business at risk in the process.
It is also tricky to determine the value of bitcoin and other cryptocurrencies. Right now, there are about 17 million bitcoin in existence and the supply is limited to 21 million which won’t be reached until the next century.
The market capitalization of bitcoin is about $100 billion which is bigger than that of U.S. investment bank Morgan Stanley but it was just $15 billion at the beginning of the year. Ethereum, the second-biggest cryptocurrency, is now worth almost $30 billion.
Ken Dickson said that if the supplies are fixed, then the prices are being determined by demand which would be determined by sentiment; Ken is the investment director, money markets and FX at Aberdeen Standard Investments.
He said that this would result to a change of price with bubbles, booms and busts. Unless there is a reform in the supply processes of these instruments, there is no likelihood that they will play any part of an investment portfolio.
Bitcoin has been on a big dipper ride this year. After getting to a new high below $5000 in early September, it lost around a third of its value within two weeks. Since then it has almost doubled its price again by reaching a new high of $6,000.
Ethereum has also been more erratic with its price rising almost 50 times from the beginning of the year to June, before falling to a fifth as reported by industry website CoinDesk.
The asset manager said that the kind of volatility which was expressed shows that committees at institutional investment firms looking at relative risks of asset classes may not consider cryptocurrencies.
Butterfill said “Your committee on risk-budgeting will say: it is not advisable to hold a lot of that because of the way it increases risk in your portfolio.” “Although I expect volatility to decrease with time but risk budget teams have to look at the history.”
For now, most of those that are investing in cryptocurrencies are high-net worth individuals, companies that are managing money for well to do families, some venture capital investors and wealth managers.
Emad Mostaque said that it’s crystal clear that money is going into these funds; he is the co-chief investment officer at the London office of South Africa hedge fund firm Capricorn Fund Managers.
Alistair Milne, the co-founder of the Mayfair-based Altana Digital Currency Fund, compares the investment in crypto funds with the beginning of the hedge fund boom which occurs in the early 1990s, during that time wealthy people are the first to invest and they made high returns.
He also said that it usually begins with individuals with high-net worth but institutional investors started getting themselves involved in 2004-2005.
There are various approaches taken by the new crypto hedge funds, one of which is initial coin offering (ICOs), which involves betting on new coins so as to raise funds, the price direction or the differences between the rate of exchange of many cryptocurrencies.
BitSpread which is a new London-based fund, has said that the $25 million market-neutral fund which trades on price differential alone gives most of the investors an entry to the market without exposing them to violent price swings.
This year the fund has increased by 32% and has been able to exploit the kind of arbitrage which is possible in a young market where there is existence of large price gap.
The founder of BitSpread, Cedric Jeanson said “Institutional investors have not invested in this ecosystem because they have not gotten the right approach.”