On Wednesday, prominent cryptocurrency investor Michael Novogratz told Bloomberg that institutions are starting to enter this game. According to a recent report from the Financial Times, the incumbent chief executive of Galaxy Digital is entirely correct.
The outlet reports that Elwood Asset Management, an institution that manages British billionaire investor Alan Howard, is looking to launch a crypto venture worth $1 billion.
$1 Billion Crypto Play
Speaking in an interview with FT, Bin Ren, the chief executive of Elwood Asset Management, said that his firm is working on a platform that would assign institutional investors diverse, vetted crypto portfolios. The goal, Ren noted, is to ensure that institutional investors don’t lose capital in questionable vehicles and funds. In the CEO’s words:
“Losing traditional assets in the real world is hard. In the digital world, it’s very easy to lose assets — put in the wrong address for a bitcoin transfer and it’s gone forever.”
That’s not all, many of the “hedge funds” currently in the market may not be suitable for institutional investment. The FT specifically calls out three issues: 1) funds based in questionable jurisdictions with potentially minimal oversight, like the Cayman Islands; 2) a lack of proper custodians to oversee cryptocurrencies in the fund; and 3) undeveloped managers that cannot produce consistent and strong returns for their clientele.
Elwood is currently sifting through hundreds of hedge funds in an act of due diligence. It hopes to allow its clients to input factors “such as the risk they are prepared to take, their expected returns and the liquidity terms they want, while also measuring the potential correlation with other assets they own” to determine the best crypto portfolio possible.
Howard and his management are seemingly responding to the outperformance of some select crypto hedge funds over recent years. As remarked by the founder of Crypto Fund Research in a column for CoinDesk, industry funds have widely outperformed Bitcoin itself over the past few years. In fact, since December 2016, the research firm’s basket of cryptocurrency funds has gained some 1,400%, outpacing Bitcoin’s relatively measly 1,000%.
Crypto funds’ outperformance comes as altcoins have notably lost steam against Bitcoin, making the performance of these managers that much more impressive.
Elwood may also be looking to provide institutions with alternative investment vehicles in the currently tumultuous macroeconomic climate. At current, some of the most popular asset classes and investment vehicles are underperforming.
Some $17 trillion worth of debt (bonds) is negative-yielding; the S&P 500 is up 16% year to date, but many analysts are expecting an impending recession. The strong performance that Bitcoin and other cryptocurrencies have posted this year, despite the harrowing political and economic climate, is likely becoming extremely attractive to underperforming institutional players, hence Elwood’s latest venture.
Elwood’s new platform isn’t the only sign that institutions are taking the plunge. Bakkt, for those unaware, is expected to be launching its Bitcoin custody and future products in the coming three weeks. And according to Sam Doctor of Fundstrat Global Advisors, there is a “critical mass” of institutions — everyone from market makers and liquidity providers to traders and hedge funds — ready to adopt Bakkt’s products.
According to Novogratz, these fresh institutional inflows will be a boon for the price of Bitcoin:
“I’m not selling the next time we hit $14,000. The second time we reach that level, [there may be] a move to $20,000. I don’t expect this to happen in the next few weeks: I don’t expect it to the middle or the end of the fourth quarter. But the next wave will come when the institutions — the state of X, Texas Teachers Union, and those guys — come in, and then you will see Bitcoin hit $20,000 and higher.”