Australian super fund AMP, US state pension funds in Wisconsin and Michigan, as well as an unnamed UK pension fund, have all now made crypto allocations according to recent reports. As early adopters, will these asset owners reap a rich reward, or eventually regret going for “digital gold”? CoreData spoke to several asset owners and others about the investability of the controversial asset class.
Graduating to institutional grade?
Our own research has found that crypto is now held by 11% of Australian individual investors[1], while in the UK, 12% of UK adults now own crypto[2]. Ownership in the US is likely to be even higher, even before the impact of the crypto-friendly Trump regime. For institutional investors, however, there are several prerequisites that need to be met before allocating – and most cryptocurrencies do not yet tick these boxes.
“Investable to my mind means that there is a secure way to own the asset, there is a business case for the asset, it has value and you can plausibly estimate expected returns and risk,” explains Paul O’Brien, a trustee and investment committee member at Wyoming Retirement System, but speaking here in a personal capacity. “So on those dimensions, at least some of the crypto space qualifies as investable. Bitcoin is, I think, established as an asset. Some funds invest in gold and bitcoin is basically digital gold; it’s intrinsically useless but people value it and will pay for it. Stable coins have a business purpose for international trade, but they are a cash asset. Then the crazy meme coins are highly speculative bets.”
Hugh Cutler, chief commercial officer at Mobius Life, says institutional investment is likely to be confined to bitcoin in the short term because of concerns over the custody of crypto assets. “There are now custody solutions for bitcoin which are institutional grade,” he says. “Without institutional grade custody, I don’t believe it will be widely adopted as an institutional asset. As a trustee or fiduciary, you might be prepared to take the economic risk of the price of bitcoin, but you can’t take the risk of it being stolen.”
Caution abounds
At this stage, many institutional investors are still cautious. A senior investor at a German insurer comments: “Institutional investor interest is growing. However, real investment activity is limited among insurance companies or pension funds. Why? Currently, there is no real asset behind it, so most conservative professional investors I know are rather sceptical.”
Sachin Jaitly, a general partner at Morgan Creek Digital, a US firm specializing in early-stage investments in digital tech companies, says personal ownership of crypto by investment decision-makers can make them more comfortable allocating within their institutional portfolio. “If the person making a decision owns digital assets, that is a huge psychological barrier overcome”, he says. He cites family offices, where family members may own digital assets themselves, as being ahead of more conservative institutions in allocating to crypto.
Other investment leaders remain hostile to the entire concept, however. Bryan Hedrick, the investments director of a public pension in the United States, says: “I think it’s an absolutely horrible idea. I cannot see any reasons whatsoever for any institutional portfolio to invest in crypto in any way, shape or form. I am not even going to say invest, I’m going to say speculate, because it’s not an investment, it’s pure speculation.”
And while some see a crypto-friendly US government as good for its acceptance as an asset, Hedrick doesn’t: “The US government getting into the crypto game is like the Dutch monarchy getting into tulips in the 1630s!”. Nevertheless, Hedrick is supportive of the tokenisation of traditional assets, saying: “Blockchain is a genius idea. It is fantastic, it has so many applications”.
Even for institutional investors open to crypto, there is a learning process to go through, O’Brien says. “You can’t just start investing in crypto as a responsible fiduciary. You must spend a significant amount of time learning about it, establishing security, becoming comfortable with it and all of the risks. There’s an element of strategic commitment. It is very different to going out to buy a stock today. You must do the spade work to build the capacity to invest in crypto.”
Indirect exposure may hold more appeal
Morgan Creek Digital’s Jaitly said education is part of his firm’s role in offering early-stage exposure to sectors such as blockchain technology, AI and computing infrastructure. For institutional investors, crypto infrastructure is often more appealing than cryptocurrencies as it fits into their alternative assets strategy. Morgan Creek Digital’s most recent fund has a mandate to hold up to 30% in digital assets such as bitcoin and Jaitly added: “No-one has opted out of the digital assets element yet”.
He added that investors should keep an eye on the use of crypto by sovereigns, as at least eleven countries now own cryptocurrencies as assets.
If both individuals and governments continue to buy cryptocurrencies, that will support the case for institutional adoption. Time will tell, but as crypto becomes more investable and more widely used, it looks certain to feature in more asset owner discussions. At CoreData, we will be tracking developments closely and producing research on what could be an important trend for institutional investing.
Matthew Craig is a senior consultant at CoreData Group, a global specialist financial services research and strategy consultancy. To find out more about our industry insights and research programmes, you can reach him at [email protected]
[1] Australia’s Crypto Investors: A growing market for advice, white paper, April 2024
[2] FCA finds crypto ownership continues to rise as it delivers plan to regulate crypto, press release, 26/11/2024