When cryptocurrency Bitcoin propelled ahead of $19,000 in 2017 due to the aggressive retail-led rally, the financial industry limited itself to a mere spectator. However, the sector is playing a more active role in the cryptocurrency’s latest surge.
Licensed crypto exchanges, Bitcoin funds, and a regulated futures market have inspired the trend-following quant funds, asset managers, and family offices avenues to open up investments that didn’t exist earlier. Plus, the 170% jump in Bitcoin’s price in 2020 at the backdrop of the never-seen pandemic has forced institutions to size up the volatile asset.
We could see institutional FOMO in 2021
During an interview, PwC’s Hong Kong-based Global Crypto Leader Henri Arslanian stated that the multitude of regulated crypto exchanges and custodians had eliminated the ‘career risk’ for institutional investors. He explained that in 2017, there was retail FOMO and he questioned whether we would see institutional FOMO in 2021.
Bitcoin has continued its upward trajectory and kick-started December with a bang. The cryptocurrency was agonizingly close to touching the record of $20,000. This surge has also to do with the ease in trading of Bitcoins as investors now find Bitcoin trading a hassle-free task. Bitcoin trading apps have provided easy-to-use platforms for investors to trade Bitcoin and are offering lucrative services. Trading app Bitcoin trader have become immensely popular among investors for its customer-centric service and hassle-free interface.
There are mixed feelings about Bitcoin’s surge in the industry. Proponents point out that it is muscling in on gold as a portfolio diversifier, as stimulus injections to negate pandemic’s economic damage weaken the dollar. On the other hand, critics have rubbished these claims and feel this is pure gambling by retail investors and speculative pros in a scandal-prone sector. The critics have gone further ahead and have predicted a bust similar to the one after the peak three years ago.
Grayscale Bitcoin Trust to be the game changer
JPMorgan Chase & Co. strategists consider Grayscale Bitcoin Trust — which invests in the digital coin and tracks its price — as a potential window into bigger crypto ardor beyond the retail demand from Millennials.
A team under the leadership of Nikolaos Panigirtzoglou has written a note on 27 November saying that the trust’s stratospheric growth sheds light on the role of longer-term investors like asset managers and family offices. These offices and investors are more active in recent times compared with trend-following commodity trading advisors.
According to its website and factsheets, Grayscale vehicle’s assets had increased to more than $10 billion from $2 billion at the start of December last year. An investment report has revealed Grayscale has drawn close to $720 million of inflows in the third quarter. The report further mentions that hedge funds dominated institutions made up 81% of the money coming into the firm’s digital-asset funds.
In an important development, Guggenheim Partners LLC reserved the right for its $5.3 billion Macro Opportunities Fund to invest in the Grayscale trust last month.
Michael Sonnenshein, managing director of Grayscale Investments in New York, feels that the institutional investors want portfolio construction in the wake of Covid and how they need to reposition themselves given how governments have injected stimulus into the system. He also points out that the size of investment allocations is growing.
Finance industry continues to embrace Bitcoin
Fidelity Investments recently announced the launch of a passively managed Bitcoin fund. This fund focuses on qualified purchasers through family offices, registered investment advisers, and other institutions. Besides, public companies that have invested in Bitcoin, including Square Inc. and MicroStrategy Inc. Digital assets continue to receive strong backing from investment managers. Experts including Paul Tudor Jones and Stan Druckenmiller consider digital assets a hedge against potential inflationary pressure, though price increases remain subdued.
Digital assets continue to be seen as a fringe market for the nearly $52 trillion of funds managed by institutional investors. It is largely because the total crypto market capitalization is just $580 billion. Plus, potential obstacles like the notion of Bitcoin ownership being concentrated among a few large holders known as whales exist.
However, PwC’s Arslanian feels as investors become more comfortable with Bitcoin, the pressure will increase on the asset managers to consider Bitcoin. “The question investors will ask fund managers will steadily switch from ‘why did you invest in crypto?’ to ‘why have you not yet invested in crypto?’” he notes.