Happy Monday guys! After a good solid 'green' weekend, bitcoin is down today. I just finished drinking my coffee and getting my daily dose of bitcoin news. From what i sense, everyone is eagerly waiting for the crypto market to receive a tiny drop from the vast ocean of institutional capital.
https://www.ccn.com/inevitable-that-pensions-and-endowments-make-crypto-play-hedge-fund-exec/
The above article says institutional capital in crypto market is inevitable. It also mentions pension funds, endowments, hedge funds and the need for custody services. So i thought it would be nice to shed some light on institutional money so that people who don't know about it, can be slightly better informed while reading such articles as the ccn one mentioned above.
So what is institutional capital? Who owns it? How did they get it? And what is an institution?
So broadly speaking, financial firms like banks deal with 3 types of clients - retail (like me and most of the world population), corporate (companies) and institutions.
Institutions - the source of the much awaited institutional capital - are nothing but aggregators of capital and thus any financial intermediary with a large pool of money. Examples -
Pension funds
Insurance firms
Mutual funds
Private banks
Family offices
Corporte pension schemes
Hedge funds
Traditional Asset management firms
University endowments
Charities
The above are all types of financial institutions with the exception of charities. Most accumulate capital from individuals.
Now while most of these are clubbed together as financial institutions, they differ in their ability to take risk, holding period, investment strategy and return expectations to name a few. Pension funds for example forecast outgoing payments that they need to make over the coming years, and invest in assets that will generate an income to meet those payment liabilities - a strategy known as Liability driven investing. They have low risk apetite, and would ideally invest in bonds and less volatile dividend paying stocks. They may also invest in a basket of securities, based on Modern Portfolio Theory.
Hedge funds are on the other extreme have high risk appetite, are not limited by an investment strategy and can afford to take short term bets. To give you an idea of their risk appetite, some type of hedge funds are also know as 'vulture funds' that invest in bankrupt companies.
Family offices will usually focus on capital preservation and mutual funds will be bound by investment stategy mandates.
The importance of understanding what each institution does is to understand whether their funds under management will be invested in crypto markets or not. Most likely family offices will get into it. Hedge funds and banks are already investing in cryptocurrency. However, a very large pool of capital will not get into it for a long period of time - pension funds, insurance companies and mutual funds. Not because they dont want to, but, because in the current scenario, they simply can't.
Pension funds, insurance firms, and mutual funds are extemely regulated. Crypto markets are not regulated at the moment. there is no price uniformity between different exchanges. Liquidity is not very deep to absorb large orders. And these are just a few reasons. Moreover the market at $300 bn is just way too small for an industry that put together manages most of 30 trillion us equity market, and 30 trillion us bond market (the figures may be a little different but they are not way off).
Such funds will wait for the market to grow in size, & be properly regulated before they start thinking about it. And no, custody, as mentioned in the article as one of the issues, is not an issue. In fact third party custodian for crypto assets is a risk (think your coins, passwords and keys are held by someone else). Also a pension fund is not going to follow an endowment. The key difference is that the money owned by an endowment fund is that it is proprietary capital, ie the endowment fund is managing its own money (even though it may receive donations from third parties), like a family office and therefore can risk investing in crypto assets when it wants to. Pension funds are managing third party money. They have to wait for bitcoin to become mainstream before they can invest in it. Now, some may argue that, and even i have suggested it previously, that crypto assets are a 0 correlation asset class and therefore extremely important to institutional investors. True, but even for that, the zero correlation has to be tested once bitcoin has seen some adoption at least from institutions and is a sizable asset - we are talking trillion dollar market cap, not billions.
So guys, i personally do not think pension funds or mutual funds are coming to bitcoin soon. Dont get me wrong, a specific type of institutional money may soon be about to hit crypto markets. An etf may also be launched very soon and that will allow banks to offer bitcoin to its private banking clients, who are all millionaires and billionaires. But it could be a very slow process as well.
Most importantly, i will prefer that bitcoin goes up in price because of actual increase in use cases and transactions, not because of a short term demand - supply imbalance.
What do you guys think? If you like the article, please upvote and leave comments. Resteem it. Also, if you think it can be improved, please leave feedback.