A strong shake in cryptocurrency volatility has dulled hopes that large pension funds and traditional investors will soon stack bitcoin, as a pickup in institutional interest remains dominated by speculators.
Bitcoin, the most actively traded cryptocurrency, suffered its worst episode of uproar since the global market fell in March. At one point on Monday, it traded $ 10,000 below the nearly $ 42,000 high reached a few days earlier before recovering to around $ 35,000.
The cuts come after a record year in which bitcoin was among the best performing assets in the world. The meteoric race for digital currency has raised concerns about the formation of a potential bubble, but has also piqued the interest of hedge funds and private investors.
The regular drop of big names helped amplify the fervor. Storm clouds are starting to gather, however. Bank of America strategists last week asked clients if bitcoin was “the mother of all bubbles.”
Cryptocurrency data provider Skew added that the options markets that traders can bet on or hedge against price fluctuations are sending signals last seen in March of last year when the rate exchange rate fell below $ 4000. Expectations for short-term price movements are also extreme, suggesting daily exchange rate fluctuations of 10%, according to data from Skew.
“In our view, given their high volatility and the size of their past drawdowns, cryptocurrencies may be attractive to speculative investors, but they are neither a suitable alternative to safe-haven assets nor necessarily contribute to the portfolio diversification, ”strategists at UBS Asset Management said Tuesday.
Despite the change in narrative, which has seen Bitcoin compete to become a challenger for gold in investor wallets just a few years after being untouchable by serious allocators due to fraud and reputational dangers, these are in largely hedge funds and family offices that have plunged into the emerging market.
“We have seen many hedge funds engage in crypto, both macro and quantitatively. But if there has been a large allocation on the private side, institutional appetite is still lacking, ”Kaspar Hense, fund manager at BlueBay Asset Management.
New investors have felt that bitcoin could provide protection against inflation, which some economists believe will increase as central banks engage in aggressive stimulus programs. Supporters also said they see bitcoin as a useful tool for portfolio diversification in the hope that it won’t move in tandem with other financial assets. However, this thesis has been hotly debated.
Nikolaos Panigirtzoglou, analyst at JPMorgan, for example said that bitcoin is “not a hedge for equity investments” because the price of stocks and cryptocurrency tend to move together in the same direction.
Volatility also remains a concern for large conservative investors who would find it difficult to justify adding an asset that regularly records daily movements above 10%. Mr Hense said these features likely won’t make bitcoin a must-have for pension funds.
“We don’t think the institutional side will engage in any meaningful way with cryptocurrencies,” he added.
Still, bitcoin’s yields beat other asset classes last year, as big names such as Paul Tudor Jones showed interest. Cryptocurrency-focused hedge funds generated 194% returns in 2020, according to data provider Eurekahedge. In December alone, crypto hedge funds returned twice as much as traditional funds included in the main Eurekahedge index throughout 2020.
Chris Zuehlke, partner at DRW and global head of the Cumberland company’s crypto-trading arm, said that in the last five months of 2020, demand from bitcoin buyers has exceeded the new supply by nearly three times. . Bitcoin is “undermined” by programs that use large amounts of computing power to perform increasingly complex calculations, but the total number of coins that will eventually be available is fixed.
Despite the recent uproar, some leading investors remain bullish. Anthony Scaramucci, former White House press secretary and founder of SkyBridge Capital, called this week’s bitcoin price drop a great buying opportunity for those who missed out on previous gains.
“If you had [fear of missing out] on the $ 41,000 ride, this is a great opportunity to buy dips, ”he tweeted on Monday, days after announcing the launch of a fund specializing in bitcoin.
Other recent crypto-converts are increasingly cautious: Scott Minerd, chief investment officer of Guggenheim Partners, who announced he would invest hundreds of millions of dollars in Bitcoin in November, said monday that the price seemed “vulnerable to a setback” and that it was “time to take the money off the table”.
“For investors looking to hedge against a potential downturn and improve the risk-return profile of their portfolios, we recommend options, gold, long-term treasury bills and hedge funds,” added UBS Asset Management strategists.