As an investment asset Bitcoin has been a stellar performer in 2017, eclipsing the returns of equities, bonds, and commodities by a substantial margin. Year-to-date, bitcoin has generated a return on investment of over 950 percent. The S&P 500, on the other hand, is only up 17 percent since the start of the year, while the Barclays Global Aggregate Bond Index is up 7 percent and the Rogers International Commodity Index (RICI) is up 2.5 percent year-to-date.
Not surprisingly, more and more investors are looking at cryptocurrencies as a viable new alternative asset class and its pioneer, bitcoin, has received the majority of this new-found investor interest.
The drivers behind bitcoin’s rapid rise
The key driver behind bitcoin’s impressive rise in value in the past eleven months has arguably been its move into the mainstream as an investment. Initially, only a handful of FX hedge funds had dabbled in cryptocurrency, but so far in 2017 over 84 new cryptocurrency focused hedge funds have launched. Private banks have also shown an interest in providing bitcoin as an investment opportunity to high-net-worth clients. Falcon Bank in Switzerland, for example, has started to provide “bitcoin asset management” to clients in July, while Swissquote, another Switzerland-based financial institution, announced the launch of the first actively-managed bitcoin certificate in late November.
Even mutual funds, such as French asset manager TOBAM, are jumping onto the bitcoin bandwagon, announcing on November 22nd that it is launching Europe’s first bitcoin mutual fund to enable “qualified and institutional investors wanting to gain an exposure to the cryptocurrency to benefit from TOBAM’s top-of-the-league research and IT systems.”
Perhaps the most interesting development in bitcoin’s move towards becoming a mainstream asset class is the confirmation by the Chicago Mercantile Exchange (CME) that it will be launching Bitcoin Futures on December the 18th — which will give institutional investors a regulated, exchange-traded financial product they can use to bet on bitcoin price developments. This news was followed soon after by a similar announcement by Cboe Global Markets that its Bitcoin Futures product would begin trading on December the 10th.
Most importantly, what developments like these mean is that large funds wanting to invest in bitcoin will be able to hedge their exposure using futures. This could open the door to large mutual funds and even pension funds entering the cryptocurrency market, as they would have the tools necessary to adequately manage the risks. According to the Wall Street Journal, the Nasdaq is also planning to launch bitcoin futures on its exchange, although not until mid-2018.
How much institutional money is in crypto?
While it is very difficult to gauge how much money is being held in cryptocurrencies by institutional investors, we do have a rough idea of how large the new crypto hedge funds are that have entered the market in 2017. According to estimates by Autonomous Research, the 110 digital currency hedge funds currently have around $2.2 billion of assets under management. With the market capitalization of bitcoin sitting at around $180 billion, it's arguable that a little over one percent of bitcoin is being held by institutional investors.
However, this figure would not include funds such as the Old Mutual Gold & Silver Fund, whose portfolio manager, Ned Naylor-Leyland, told Bloomberg that the fund started buying bitcoin in April and intends to allocate up to five percent of its overall portfolio to crypto. This figure also does not include the ‘traditional’ hedge funds, such as macro and FX funds, that have been diversifying into bitcoin over the past twelve months.
Given that the total market capitalization of the cryptocurrency market is at around $285 billion, it’s likely that about one to two percent of all cryptocurrencies and digital tokens are being held by professional investment companies. That’s a tiny fraction of the available funds. While skeptics are saying that the crypto bubble is about to burst, the reality is that there is still so much institutional investor money waiting on the sidelines that the potential upside for the cryptocurrency market and for bitcoin itself is still much higher than many think.
Should, for example, a publicly-traded bitcoin ETF be approved for the U.S. market, then the percentage of institutional money invested in bitcoin could easily jump from one percent to ten percent or more. This, in turn, would boost the price of bitcoin to potentially trade at a multiple of where it’s trading now.