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Cryptocurrency investors argue that institutional buying is one more reason to be bullish. After Wednesday’s tumble, that’s becoming more and more implausible.
The problem is that mutual funds, insurers and pension funds are often seeking a particular level of volatility — or really, lack thereof — for their investments. If you have a pile of corporate cash, is it going to be OK to put some of it into an asset that can rise or fall 30% in a single day as Bitcoin did this week? Tesla Inc. and MicroStrategy Inc. have bought into Bitcoin, but few have followed them, even after Tesla’s $1.5 billion buy-in ignited a debate about corporate crypto purchases.
“You’re looking at volatility levels that are four times that of gold or of equities, and this is going to make it prohibitive for a lot of corporate treasurers and institutional investors who think that they can do a significant size holding in this,” said Joyce Chang, JPMorgan global research chair, on Bloomberg Television. “This type of volatility still compared to other asset classes is outsized for most institutional investors.”
The T3 Index’s BitVol Index, which measures expected swings in the price of Bitcoin, rose above 100 last Saturday for the first time since March. That compares with the Cboe Volatility Index or VIX, which at 20.56 is still well off peaks in February, March and earlier this month in a range of 28 to 32.
Financial firms from Goldman Sachs Group Inc. to Bank of New York Mellon Corp. and Saxo Capital Markets Pte. are citing client demand among reasons to boost their cryptocurrency offerings. The asset class still holds some attraction, particularly with Ether up about threefold since the start of the year and Bitcoin about 30% higher in an era of low yields, but days like Wednesday make the argument for Bitcoin as “digital gold” or a “store of value” look somewhat tenuous.
In addition, while MicroStrategy and Tesla have turbo-charged the debate about whether companies should hold Bitcoin, the everyday needs of the typical business may keep crypto at arm’s length.
“Most real corporations don’t want to have volatile things on their balance sheets, as the fluctuations cause fluctuations in their reported results,” said Jim Angel, a professor specializing in financial markets at Georgetown University. “The only companies that will dabble with cryptos are ones where the CEO is a true believer in crypto, and the CEO is so entrenched that the board won’t or can’t rein them in.”
However, some are making long-term commitments to crypto, which means they aren’t that troubled by frequent ups and downs, said Diogo Monica, the president of institutional digital-asset platform Anchorage Digital.
“I’m not really concerned about the long-term effects of this,” said Vincent Chok, CEO of First Digital Trust, a Hong Kong-based custodian servicing traditional and digital assets. “More and more financial institutions are getting involved in this space, which has already legitimized this industry. Many are cautiously jumping in, and a lot of money is being invested in research and proper partnerships are being built.”
However, JPMorgan’s Chang reiterated that volatility would be a top concern, given the needs of big investors and companies.
“It’s still pretty prohibitive particularly on the corporate side to look at this as a more institutional holding,” she said.
Professor Angel went further.
“Unless cryptos are a core part of their business — like in a crypto mining firm — a firm has no apparent comparative advantage over anyone else in speculating in crypto,” he said. “Boards and shareholders generally prefer that companies concentrate on where they have a comparative advantage and not get distracted in unrelated areas.”
— With assistance by Eric Lam