Funds pour into crypto, managers boost holdings

London

FUNDS have poured into Bitcoin and other cryptocurrencies in recent weeks despite the slump from their November highs.

Cryptocurrencies have proved to be highly volatile, complex and risky assets, but hedge fund and private equity managers stated in a recent EY survey that they intend boosting their holdings substantially.

The recently published survey of alternative managers revealed that 10 per cent of hedge fund managers and only 4 per cent of the private equity managers reported crypto allocations.

However, 31 per cent of hedge fund managers and 13 per cent of private equity managers said that they planned to add cryptocurrencies to their portfolios in the next 1 to 2 years, according to respondents who were interviewed between July and September 2021.

Traditional fund managers, pension funds and foundations have also become more positive about cryptos, according to the EY survey.

Respondents were managers of 107 hedge funds with a total of US$1.2 trillion under management, 103 private equity firms representing nearly US$2.7 trillion in assets and 54 funds of funds, pension funds, endowments and foundations with approximately US$1 trillion in assets under management.

The largest managers were most likely to increase their exposure. A recent Goldman Sachs survey of more than 150 family offices worldwide also showed that 15 per cent of respondents have invested in cryptocurrencies.

Recent inflows confirm that these managers are already beginning to add more cryptos to their portfolios.

"The earliest days of cryptocurrencies were marked by challenges of self-custody and a limited market, but those have started to fade," said an analysis by the Institute of Chartered Accountants in England and Wales.

"With some risk mitigation now in place, there is a willingness for other institutions to look at digital assets as an alternative option for investment purposes or treasury management. With another 2,000 different digital asset types currently, various investment opportunities exist."

According to CoinShares, a large European digital asset investment firm and adviser, US$787 million flowed into digital asset investment products in November and raising year-to-date inflows to a record US$9.5 billion.

In the 11 weeks until the end of November, inflows into Bitcoin amounted to a whopping US$2.7 billion, according to a calculation by CoinShares. Ethereum, the next favourite crypto, experienced 5 consecutive weeks of inflows.

The timing of the inflows indicates that buyers are paying steep prices in increasingly volatile and risky markets.

In contrast, a sizeable number of traditional and alternative fund managers are steering clear of cryptos which have grown from a market capitalisation US$191 billion at the beginning of 2020 to US$3.1 trillion currently.

Of this amount, Bitcoin's market capitalisation is estimated at US$896 billion, down from the recent peak of US$1.2 trillion.

The cautious managers are concerned about volatility and liquidity, especially in a downturn. They are also concerned about tighter regulation and the potential of fraud.

The latest example of the crypto dangers was the recent uneven decline of Bitcoin followed by a sudden 12 per cent slump on Saturday (Dec 4) and a slight revival later in the day.

Ethereum slumped by 13 percent, but also revived. At one stage on Saturday, US$400 million was wiped off crypto currencies, Reuters reported.

A chart by IG, a spread betting and brokerage firm, showed that a single Bitcoin began the year at US$32,000, soared to US$64,862 by mid-April, slumped to US$29,351 in mid-July and peaked at US$69,050 in the second week of November.

Bitcoin has fallen by 28 per cent to US$49,361, although it is still 54 per cent higher than its price at the beginning of the year.

Berkshire Hathaway's vice-chairman Charlie Munger told a conference last Friday that he wished cryptocurrencies did not exist, and praised China for taking action to ban their use.