Here come the institutions to Bitcoin… again

Markets May 13, 2020

Through the 2017–2018 cycle, it felt like there was a new story almost every day about the impending wave of institutional investors joining the crypto revolution. It seemed inevitable that the surging demand from traditional asset managers would drive the price of Bitcoin and other assets up forever, and there were innumerable new projects and companies rising to meet this upcoming demand.

In the intervening years, this new demand never materialized, and most projects were quietly scaled back or shuttered. Despite this slow growth, some major legacy financial corporations are beginning to recognize the utility of including exposure to bitcoin and the crypto space in general as a component of a diversified portfolio.

Last week, Paul Tudor Jones, one of the most legendary hedge fund managers of all time, revealed that Bitcoin is part of his portfolio. His reasoning: it’s a great hedge against monetary inflation and Bitcoin is significantly undervalued.  

In a market outlook report titled “The Great Monetary Inflation,” the billionaire investor reportedly said that Bitcoin reminds him of the role that gold played in the economic problems of the 1970’s. Addressing what store-of-value assets will be winners in ten years’ time, he wrote:

“At the end of the day, the best profit-maximizing strategy is to own the fastest horse. Just own the best performer and not get wed to an intellectual side that might leave you weeping in the performance dust because you thought you were smarter than the market. If I am forced to forecast, my bet is it will be Bitcoin.”

Does Paul Tudor Jones’ entrance into the market signal a larger resurgence in demand from institutional investors or is this just another one-time event?

“Nobody gets fired for buying IBM”

The announcement caused massive excitement in the crypto markets, with the price of Bitcoin crossing the much anticipated $10,000 mark. Industry experts agree that this revelation is a huge validation of Bitcoin as an institutional asset class and is likely to bring in more big investors into the market.

Despite its age, the adage “Nobody gets fired for buying IBM’’ still resonates across technology and financial markets. If you were a fund manager buying Bitcoin as the market tanked from $19,500 to $3,500 at the same time as Warren Buffet was calling the asset “rat poison squared,” you would have a lot of explaining to do to your boss and investment committee. If you bought Google or Amazon or even IBM at the same time, then you simply would continue on your day. As Peter Lynch, famed investor of Fidelity’s Magellan Fund, framed this point: when IBM underperforms, no one blames the fund manager; instead IBM has simply “disappointed the market”.

Arthur Hayes, the CEO of BitMex tweeted “Expect a lot of beta fund managers to begin cooking some copypasta” while Karen Finerman, Co-Founder and CEO of Metropolitan Capital Advisors echoed the sentiment on a recent episode of CNBC Fast Money, saying “Nobody wants to get outed having owned Bitcoin if it completely falls apart. But if you can say that Jones owns it also, maybe that gives you a little bit of cover.”

Paul Tudor Jones’s very public bitcoin allocation combined with other famed institutional investors from David Swensen of Yale and Renaissance removes some of the risk for institutional investors thinking about making a similar decision. Slowly and then quickly, Bitcoin and cryptocurrencies will become just another asset class.

Institutional grade

During the last bull cycle, while some smaller institutions were diving in headfirst, others are still hesitant to hold Bitcoin and cryptocurrencies directly. They cited concerns about a lack of custody options, a lack of regulatory certainty, or more familiar ways to gain exposure. These institutions want to access this market through investment products, vehicles, and service providers that look and feel familiar. Since 2017 we have seen the range of suitable options to build exposure radically increase.

For these investors that are willing to hold crypto directly, there are now multiple qualified custodians, ranging from Coinbase Custody and Anchorage to traditional firms like Fidelity, when none existed before. For those investors who don’t want to hold crypto directly, they can still build exposure through investment vehicles like Grayscale’s suite of investment trusts or Coinshare’s ETP. And for those that want to build exposure on both sides of the market in a CFTC regulated market, they can now access CME’s futures or ICE’s Bakkt futures.

Today the market is much more well-positioned to absorb institutional capital than it ever was in 2017–2018.

Ringing the bell

More than three years ago Chris Burniske and Adam White rang the bell for bitcoin to be recognized as an alternative asset class. This narrative stagnated, but perhaps may finally have the opportunity to take off.

The market looks much safer with a wider range of options for a traditional investor to build exposure than it did three years ago, and there has never been the same amount of institutional awareness and legitimacy associated with cryptocurrencies.

With traditional markets and economies staggering to handle the global pandemic, we may see a resurgence in institutional demand from crypto-outsiders like Paul Tudor Jones. And unlike 2017, this time the market may be ready to handle that growth.

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