Will your pension fund buy bitcoins?
There’s growing evidence of new bitcoin buying amongst institutional investors.
The giant mindset shift is underway. The world is being forced to adapt quickly to new challenges. But traditional financial markets seem to be returning to a relative ‘normality’, ignoring the panic of the last few months. Investment funds have been investing into the same investments again, assured by the trillions of dollars of helicopter money supporting the financial markets. But below the surface all is not what it seems. Out of the ashes of the last global financial crisis a new ‘currency’ was born. Perhaps now it’s time for bitcoin to step forward, cross the chasm, and be considered seriously by professional investors as the early leader of a new emerging asset class.
Whilst many cryptocurrencies, opportunistic and experimental, are flailing, bitcoin is still going strong, eleven years young, no hackings and a blockchain infrastructure that is becoming more resistant with its maturity. Admittedly the recent March 12th price drop was a big shock to the system; an outcome of the lack of liquidity across the global financial markets, but bitcoin survived, and within a matter of weeks rebounded strongly to pre-crash levels. Every ‘survival’ enhances its personality, further proving doubters wrong and fuelling the ‘believers’ conviction. Yet, it’s still a small market. At only $160bn (compared to the Swiss stock market that’s ten times larger, and a Gold market of nearly fifty times larger) it’s no wonder that many traditional financial institutions have yet to buy into the hype. After all, these institutions are largely run by people who don’t have the urge to speculate on a new technology or face the investing challenges of a ‘tiny’ volatile market when they’ve got the bigger picture of more familiar product types to consider.
Europe has the lowest crypto adoption rates amongst traditional institutions. It’s estimated that at around 30% have ‘tested’ the crypto ecosystem. In Asia, numbers are far higher but regulations are lighter and innovation has the flexibility to move so much faster. But in the US, whilst adoption rates are not that of Asia, we’re seeing a far more solid infrastructure being developed, driving the creation of ‘real’ asset management companies with more institutional sized assets under management.
Grayscale Capital, based in New York, has over $3.7bn of investors’ money in the crypto markets, and in the first quarter of 2020 they raised an additional $500m. The majority of this money is flowing directly into bitcoins.
Grayscale are somewhat of an anomaly for the time being and overall crypto hedge funds remain fairly small. A global report on the Crypto Funds industry, released by PwC-Elwood in May 2020, shows that the average crypto fund has around $20m assets under management with most investments coming from high net worth individuals and family offices. These investors tend to operate at the nimbler end of the institutional curve, making up a large percentage of the 22% of institutions that a recent Fidelity Investments survey believed were involved in the crypto markets. They can also make smaller investments that can easily be absorbed into the market that don’t cause too much volatility with the bitcoin price. Significant inflows today from larger players, such as pension funds, would prove challenging and likely cause a fairly strong upward movement in the price of the asset.
To investors comfortable with the crypto ecosystem, the foundational infrastructures are in place to invest, and trade, profitably. Paul Tudor Jones (the famous Hedge Fund billionaire) spoke just last week about his belief in bitcoins as an investment. He has accumulated around 2% of his wealth in bitcoins, believing that investors have to bet on the ‘fastest horse in the race’. In the US, the Ivy League endowment funds for Harvard, Yale, MIT, and others have been investing into bitcoins for two years now. One US pension fund (Fairfax County Retirement Systems) invested over $70m into crypto-assets in 2019, others have yet to (publicly at least) follow suit.
There still has to be more work done to translate the crypto ecosystem from being a niche into a truly investable global market where larger investors can comfortably deploy capital. The ‘lack of understanding’ amongst institutional players is disappearing fast but they still have a few significant concerns, the most notable being security risks surrounding exchanges. The majority of these exchanges are centralised vehicles, and many operate in jurisdictions with little or light regulatory oversight. They certainly don’t comply to European anti-money laundering (AML) or counter-terrorism financing (CTF) policies and there is no global regulatory standard yet for them to adhere to. The result is currently a two-tier ecosystem where retail and non-regulated parties happily trade in one tier, and regulated institutions who have to take a cautionary approach dealing with only compliant and select third parties in the other tier. Luckily, strong tools such as those built to flag tainted coins and detect criminal activity on the blockchains go some way to helping institutional monitor activity and trade compliantly.
Another challenge is the fear of hackings that could result in the immediate loss of crypto-assets. Today, these institutional fears are understandable. Many of the new exchanges and platforms in the crypto world lack the operational processes and expertise to meet regulated financial markets standards. Some are clearly working hard to create those structures, including onboarding expert institutional employees with a strong understanding of core banking functions, as well as hiring top cryptographers and developers to secure their networks, but infrastructure upgrades and process improvements take time.
In today’s pensions and asset management world, rules and regulations also largely prevent participants from even considering bitcoin investments and few have heard of, or use, the Exchange Traded (equity) Certificates (ETC’s) that allow them access to bitcoin investments. But as the crypto space further matures, and our ‘new normal’ world shakes up the traditional financial market ecosystems, the traditional pension funds and asset managers will be forced to re-think strategies, seek returns from markets previously out with their comfort zones and re-write their investment mandates. It may still be a few years away for those more restricted of funds to invest in bitcoin but the changing world may force them to act and think in a more nimble way. Maybe then too, readers, via your pension funds, will be investing your money in bitcoins.
Chris Thomas is Head of Digital Assets for Swissquote Bank. You can follow him here or on Linkedin. Feel free to also reach out to him directly.
Swissquote Bank have been involved with crypto-asset trading since early 2017 and are now open to institutional trading and custody of bitcoin and other crypto-assets.
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