You wouldn’t think that people are avoiding bitcoin. In 2017, the digital coin has climbed more than 450%. And the bitcoin market is now worth more than US$90 billion.
Source: Coin Desk
Yet even as its popularity explodes, the big money hasn’t piled into the digital token yet. This morning the Australian Financial Review (AFR), wrote:
‘…for all the hype, mainstream institutional investors are steering clear of the nascent market, taking the view that it is too lightly regulated, too volatile and too illiquid to risk investing other people’s money in.’
Bitcoin Hedge Funds
Because of its volatility, bitcoin hedge funds are now popping up all over the place. The AFR continues:
‘This year, though, a flood of new hedge funds focused on cryptocurrencies has offered institutional investors who might be unfamiliar with the market a potential route into the world of digital currencies.
‘According to Autonomous NEXT, a financial technology research house, 84 so-called crypto hedge funds have been launched this year, taking the total to 110 with about $US2.2 billion in assets altogether.
‘But the fact most of the funds are relatively small with a limited track record — and that cryptocurrency price swings have been so pronounced — means the world’s pension funds, insurance companies and large mutual funds are staying away.’
According to Autonomous NEXT partner Lex Sokolin, there are likely only a couple of funds worth hundreds of millions of dollars. Far more are in the US$5 million to US$20 million range.
How Do You Value Bitcoin?
It’s not just because of volatility that pension and super funds don’t want to be associated with bitcoin. It’s also because of a question many investors have, ‘how do you value bitcoin?’
Hedge funds can get away with trading bitcoin and make huge amounts of money because of wild price swings. But for a pension fund that wants a stead returns with limited volatility, bitcoin just doesn’t cut it.
For now, it’s just individual investors and high net worth individuals piling into bitcoin. ‘It’s clear there’s money piling into these funds,’ said Emad Mostaque, Capricorn Fund Managers co-chief investment officer. ‘There’s just not that institutional investor comfort yet.’
But could that day soon come?
I believe it could. Maybe institutional investors might not buy bitcoins directly. But they might invest in securities where they have exposure to digital currencies.
Think of collateralised debt obligations. These were the hot products that were thought to be risk free. However as we all found out in the 2008 meltdown, a group of risky mortgages is anything but risk free.
A similar security might pop up for bitcoin.
If there’s money to be made, you can be sure institutional investors will want a piece of it. And when that happens, the price of bitcoin could soar to new heights.
Want to learn how to buy and sell bitcoin before institutional investors join the party? Click here.
Junior Analyst, Money Morning