Institutional Investors Overcome Barriers To Bitcoin

Before 2000, most traditional institutional investment portfolios did not allocate to commodities and traditionally balanced portfolios of stocks (60 percent) and bonds (40 percent) were the prevalent norm with no alternatives across the board.

Given that diversification is a significant catalyst for investment, portfolios started greater diversification into alternatives and the result that developed over long years was that we can see commodities now as an established trading market.

The stock market underperformance created an environment in which investors were open to exploring other sources of return. It is now accepted that commodities are a separate asset class for traditional investment purposes.

Considering the status quo of cryptocurrencies, most market observers would comfortably say “We’ve Seen This Movie Before”. Cryptocurrencies are currently heading on the footsteps of commodities and will soon be recognized as an independent asset class.

Fidelity’s 2021 Institutional Investor Digital Asset Study of more than 1,000 institutions found that 23 percent believe digital assets belong in an independent asset class.

The similarities in the development of the promising commodities markets with the current maturing digital assets markets and points to several shared characteristics including a developing product suite, market access, an improved regulatory environment, and a transforming market infrastructure.

From the launch of regulator approved bitcoin ETFs to the development of institutional custody of digital assets, through to the development of digital assets futures, the “suite” has now matured and is ready for institutions to access, as witnessed with the commodities markets.

The most compelling case, however, is the outstanding performance of the asset class. Bitcoin’s 10-year performance to the end of 2020 significantly outperformed every other asset class with only two drawdown years, in one of the years where the S&P was also down.

It is this performance that is largely uncorrelated to other asset classes that is attracting investors, across the board. The Fidelity Study found that 52 percent of surveyed institutional investors in Asia, Europe, and the US have an allocation to digital assets.

Recent global monetary policy, and increasingly fiscal policy, have created a positive macro backdrop for future bitcoin investment allocations and many investors remain concerned at the rate of central bank balance sheet expansion, the scale of the budget deficits being run in many developed economies, and the potential for inflation as a result.

Bitcoin is seen by many as being an asset that will have a leveraged return profile in an inflationary environment and see it therefore as a portfolio hedge against this outcome.

Investors like Greg Foss, the career high-yield bond trader turned bitcoin bull, agree. He would also point out that we went through a similar period of market adoption of high yield debt in the 80s. Michael Milken, the architect of the junk bond, was a pariah in the eyes of institutional investors on Wall Street in his early days, until his approach to risk adjusted junk bond yields relative to shares was embraced.