Bitcoin finds room in small funds; large institutions still on sidelines

  • TECH
  • Monday, 21 Mar 2016

Currency evolution: Bitcoin has gone from its 'hacktivist' origins to a more institutionalised ecosystem.

NEW YORK: Digital currency bitcoin has found favour among smaller investors, thanks to the availability of funds designed to invest in it, but remains a niche among the larger investing community.

Investors at some family offices, smaller mutual funds, and traders at hedge funds say bitcoin has helped returns and demonstrated a low correlation with other asset classes.

Hopes that bitcoin would become a broadly used alternative to other currencies helped buoy its price to more than US$1,000 (RM4,070) in December 2013, when its market capitalisation was US$13bil (RM52.8bil).

But the market cap has retreated since then, to about US$6.4bil (RM26bil) as of Thursday.

Early enthusiasts for the cryptocurrency were drawn to its revolutionary ideals of transparency and a lack of central or official control. The risks of dealing in bitcoin were laid bare in 2013 when Tokyo-based exchange Mt Gox collapsed after admitting it had lost the equivalent of hundreds of millions of dollars of investor funds.

The currency's earlier ties to gambling and criminal websites did not endear it to traditional investors.

Jeremy Millar, founder and managing partner at Ledger Partners in London, estimated that 50% to 90% of bitcoin's current US$6.4bil (RM26.03bil) market cap is held by near-institutional money such as individuals at hedge funds and family offices. That has not changed over the last two years.

He does not have an estimate for institutional investment holdings of bitcoin. But he said they are likely to be insignificant, compared with the smaller investors who have fewer restrictions about fund allocation.

"What is clear though is that over the last two years, bitcoin has emerged from its 'hacktivist' origins to a more institutionalised ecosystem which includes the participation of hedge funds, traders, and professional investors," said Millar.

Bitcoin in portfolios

Funds dedicated to investing in bitcoin are relatively small. The largest is the Pantera Bitcoin Fund, a US$160mil (RM650.6mil) hedge fund founded by Dan Morehead, formerly of Tiger Management, available to institutions and individuals who invest US$50,000 (RM203,250) or more.

According to a Pantera Bitcoin Fund brochure, the fund was launched in July 2013, a period when bitcoin traded at around US$65 (RM265). On Thursday, it traded at US$418.80 (RM1,700), a gain of more than 500% from July 2013. The firm did not comment on fund performance or its investors.

The majority of the Pantera Fund's investors are family offices and high net worth individuals, said two people familiar with the fund.

The Grayscale Bitcoin Investment Trust, with assets of more than US$60mil (RM243.9mil), is another vehicle for investors. GBTC is backed by bitcoin advocate Barry Silbert and his Digital Currency Group.

It is the only publicly traded US security in the over-the-counter market invested in bitcoin. Volume is thin, with a few thousand shares traded daily, according to Thomson Reuters data.

Antonis Polemitis, managing director at Ledra Capital in New York, a family office specialising in education and technology, said that on average, clients have allocated 1% to 3% of their portfolios to bitcoin.

"A lot of people will take that bet with 1% of their assets," he said. "A 1% loss does not change anyone's life in any way. If it goes up 10 times, then you get to feel very smart."

Some investment managers say having bitcoin in portfolios has helped performance.

ARK Invest, which manages four exchange-traded funds with US$240mil (RM975mil) in assets, holds GBTC in its US$12mil (RM48.8mil) Next Generation Internet ETF and the US$7mil (RM28.4mil) ARK Innovation ETF.

Chris Burniske, analyst and blockchain products lead at ARK Invest in New York, said since investing in September 2015, GBTC has contributed 67 basis points to the Next Generation Internet ETF's return and 62 basis points to the ARK Innovation ETF.

For 2015, the Next Generation ETF posted a 15.29% return, while the Innovation ETF had 3.76% gains.

For Kingsbridge Wealth Management, a multifamily office in Las Vegas with US$150mil (RM609.9mil) in assets, GBTC has become a great diversifier because so far it has had a low correlation with other asset classes, said David Dunn, the firm's founder and chief investment officer. The firm has about US$1.7mil (RM6.91mil) invested in bitcoin and its underlying technology, the blockchain, Dunn said.  —  Reuters
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