According to data from Eurekahedge shared by the Financial Times, crypto hedge funds have returned more than 16% on average in 2019.
While this 16% underperformed the appreciation in the actual price of Bitcoin over 2019, 94%, dedicated cryptocurrency funds outpaced the 10.4% yielded by “traditional hedge fund strategies.”
The simple fact that crypto funds in 2019 (and over the past decade as a whole) outperformed funds holding traditional assets is likely to be a catalyst that will draw institutions into Bitcoin investing as investors continue to look for high-yield opportunities in this low interest rate and overvalued world.
Why Bitcoin’s Outperformance Could Force Institutions to Crypto
Speaking to FT, Steve Kurz, head of asset management at Mike Novogratz’s Galaxy Digital, said that the high yield of Bitcoin in comparison to other asset classes will ensure that “investors will have to pile in”:
Bitcoin has a higher return on a one, three and 10-year basis than any other asset class. When the returns are so high, investors will have to pile in.
Indeed, Binance’s research arm, in a report titled “Diversification Benefits with Bitcoin,” found that while BTC is subject to massive drawdowns and absurd volatility, this is balanced out by the asset’s remarkable returns:
All simulated portfolios which included Bitcoin exhibited overall better risk-return profiles. […] These results show that Bitcoin provides active diversification benefits for all investors worldwide, following multi-asset strategies.
What’s crazy is that hedge funds are largely underperforming their historical forerunners. FT reported in early 2019 that from 1989 to 1999, as the Dotcom Bubble was inflating, the average hedge fund posted 18.3% per annum. The next decade, they returned just 6.4% a year. In the last decade, they produced a mere 3.4% a year.
Considering Binance’s findings of Bitcoin being a great risk-reward provider for portfolios, underperforming hedge funds may flock to cryptocurrencies in the near future.
They’re Coming Already
The institutional herd may already be picking up on this trend of Bitcoin becoming an appealing asset for any portfolio.
Changpeng “CZ” Zhao, chief executive of crypto giant Binance, said in an interview published in December 2019 that he thinks 2020 will have a more bullish cryptocurrency market because of an “increasing amount of interest from institutional players.”
Fidelity Investments — the Wall Street financial services giant with over $2 trillion under management — recently began to roll out a Bitcoin custody and trade execution solution to thousands of institutional clients around the world.
And, Bakkt — the cryptocurrency exchange backed by Microsoft, Starbucks, and the Intercontinental Exchange — launched in 2019, rolling out its Bitcoin futures contracts in September.
The derivatives have since seen strong adoption from institutions, resulting in Bakkt launching other financial products such as cash-settled Bitcoin futures in Singapore and BTC options.
Institutions Not Needed
Despite the narrative around institutional investment in Bitcoin, some are sure that these investors aren’t needed to allow Bitcoin to succeed.
In a 2019 episode of CNBC’s “Power Lunch,” partner at Crypto Oracle and former Goldman Sachs analyst, Lou Kerner, explained that Bitcoin doesn’t need institutions to succeed and rocket higher, citing the fact that a majority of the asset’s growth has been retail-based.
Kerner even went as far as to say that the institutions will be the followers in this market, not the trailblazers:
So we don’t need institutions to come to this party for Bitcoin to break out again. People have been saying [Bitcoin needs institutions] for a long time. We’ve had a lot of legs higher without any institutional involvement. It’s coming. It’s like gravity. They’re going to be here, but they’re not going to lead the party. They’re going to be followers.