The issue of adoption is an ever-present theme in the crypto community. However, there are particular moments when particular narratives hit the public space with more or less force. Right now, there is a lull in the spin of the possibility that institutions will suddenly and strongly engage themselves in the crypto space.
In 2018, this narrative was very prevalent in the bitcoin domain as well as other major cryptocurrencies. This did not involve altcoins because not many had any illusions that companies would rush there at the get-go. However, when it comes to bitcoin, the focus really was all about investors from the corporate domain suddenly buying into BTC, ETH, and other big crypto tokens. Most of this was related to a dying hope that a bear market is just around the road.
Yet, this narrative was not that accurate. Additional many analysts tried to boil down the same possibility to a smaller alternative, saying that single-family offices running hedge funds were reaching out to crypto purchases. These are funds that run the investment funds of one family. The number of these cases were supposedly high end climbing up all of the time. However, the present reality showcases a completely different tale.
The Initial Assessment
In 2017, Angelo Robles from the Family Office Association stated in an interview that single-family offices began taking on bitcoin. The purpose of this was to diversify the portfolio in their control and also hedge against potential risks. However, the picture today is nowhere near that. Spencer Noon, who is a partner at DTC Capital and also an industry commentator said that during his discussions with about 30 family offices, only one held any cryptocurrency.
Also, he assessed their assets at around a combined $1 billion. While this is not precisely a standardized exploration of any issue, it does showcase that the idea of the institutional clients flocking to crypto is nowhere near the truth. Still, the opposition to this claim continues even today. Brian Armstrong, the CEO of Coinbase, said that institutions are beginning to make big steps into the crypto field.
In his words, based on firm deposits, there is about $200 million to $400 million in cryptocurrencies in Coinbase coffers alone coming each week from customers Armstrong labels as institutional. However, this would mean that, according to an independent overview of Coinbase transaction, the majority of all deposits they receive come from institutions. This opens up a whole new set of problems if indeed it turns out to be true.
Question of Time
In spite of the conflicting present-time narrative, a big number of experts believe that funds like these and even bigger entities are looking to get into bitcoin action. Fidelity Investment, which is a prominent asset manager found in 2019 that half of the surveyed institutions see bitcoin and other crypto-assets as something that could find a home in their portfolios.
Many see problems with custody and security, but solutions like the soon-to-be-launched Bakkt could resolve these in the near future. But, in spite of this, the presence of bitcoin in many traditional financial portfolios is growing. In their State of the Network report, Delphi Digital, a market research company showed that a portfolio that is constructed 57 percent of stocks, 40 percent bonds and just three percent of bitcoin could provide the best risk-return potential and had the smallest drawdown when it comes to many simulated scenarios.
This means that even a tiny presence of cryptocurrency could help a hedge fund be above the playing field when compared to other traditional portfolios. In the age of esports and social media ruling over traditional sports and broadcasting companies, it is easy to envision people adding crypto just as a safety precaution. Clearly, a hedge fund would be much better if it had even a low single-digging possession of cryptocurrencies.
The global financial system also shows that an alternative is needed and bitcoin could very well be it. The trade war is brewing between the US and China and the world is looking in terror to see where the chips fall. Furthermore, the global economy is slowly entering a period of unprecedented and numerous pressures.
The last week showed that the fires raging in Brazil and other nations of South America are not a local or even a regional problem. Yet, solutions for this are as unclear as ever. This is why the economies are suffering as well. Hong Kong is in the grip of an ongoing process of political turmoil, but other nations are also entering financial crisis in breakneck fashion. In one day the Argentina Person lost 15 percent of its value against the USD. As this continues, the hedge funds will naturally seek any haven they can find.
Risks and Rewards
Like always, assessments like the previously mentioned ones take into consideration the very basic things like price and markets. If a hedge fund has crypto in its portfolio it can always sell it according to the current market price. However, the real world offers many possible scenarios in between that are the main reason why hedge fund, especially small family-run ones are not going anywhere close to cryptocurrency.
The simple answer is their legal status. Bitcoin is neither legal or illegal in many nations of the world. In the US, for example, it can be taxed and many are working hard at allowing states to actually collect it as tax. However, this does not make it fully legal either. With things like the US President Trump saying he is considering whether or not to ban it, the market price of BTC is not the only thing reacting. So are the entities that might consider buying it.
Here, the problem is not the level of volatility – the majority of the hedge funds would actually go for it because of volatility that is not in correlation with the traditional elements of their portfolio. The problem is regulation and the fact that bitcoin and other cryptocurrencies are still out in the legal cold. Until this changes, funds and institutions will stay away.