How changing market infrastructure is taming cryptocurrency’s “Wild West” image among investors

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Few sectors have endured such colossal price swings and asset volatility in recent weeks as cryptocurrencies, but speakers at the inaugural DigitalAssetsLIVE summit on Thursday said evolving market infrastructure, growing product selection, and positive investment performance continue to drive digital assets’ institutionalisation, drawing more capital allocators into this once frontier market. 

The opening session heard how the previously off-piste segment of financial markets has firmly arrived within institutional investors’ frame of view, even if allocations still remain low. The Covid-19 pandemic proved crucial in the pivot from speculation to allocation, speakers said.

Lee Robinson, founder and CIO of multi-asset class hedge fund manager Altana Wealth, observed how a large number of institutions increased their gold and crypto allocations during the immediate aftermath of the initial coronavirus market shock last spring.

“Institutions have gone from a zero allocation three years ago to maybe 1 per cent core allocation and a 1-2 per cent trading allocation,” said Robinson, whose firm has experienced several cryptocurrency cycles since entering the asset class in 2014. “That’s been the big change we’ve seen over the last 12 months.”

Anatoly Crachilov, founding partner and CEO at London-based crypto-focused hedge fund Nickel Digital Asset Management, said that while the bulk of his investor base remains family offices, the composition is starting to change. “Over the last six months, the majority of conversations are now unfolding with endowments, asset allocators, investment banks which are wealth managers acting on behalf of their clients.”

Crachilov observed how discussions with larger institutional allocators tend to be more protracted than with family offices, pointing to multiple internal investment committee discussions taking place over several months prior to any final investment decision being made.

Offering the fund administrator perspective, Karine Seguin, head of business development fund administration services for EMEA at Trident Trust, said that while institutional investors are emerging onto the crypto assets landscape, they remain a minority. However, the product and instruments available have “considerably expanded” in recent times, she told the panel.

Speakers also sought to pinpoint what is bringing established capital allocators into the burgeoning asset class - weighing up an assortment of potential reasons including portfolio diversification, investment returns, hedges against inflation, and fear of missing out.

“From a pure portfolio construction perspective, it merits a place in a portfolio,” Jakob Palmstierna, global head of product and business development, GSR told the session. “It’s a liquid asset, has price discovery, and has uncorrelated returns and positive risk/return characteristics.”

He continued: “Digital assets trade very much like a macro product today, and it’s the macro traders who are coming. Whether they are discretionary or systematic, it’s a new source of potential returns, and it’s hugely beneficial for their portfolios.”

The discussion also acknowledged ongoing concerns over crypto’s “wild west” elements, including valuation, liquidity, and asset security, though panellists also highlighted the considerable strides taken in advancing the sector’s infrastructure, with more auditors, administrators, and exchanges in place as “market plumbing” has developed.

“The infrastructure is getting there, but the institutions moving in need to adopt the right security around it,” said Palmstierna. “The challenge is that for managers it’s a different story than for investors.”

Building on this point, he said asset manager considerations include risk limits and data integration, and whether they will be short-term or long-term, and systematic or discretionary. “From an investor perspective, when you allocate to one of these managers, you have to set up a new due diligence framework, because it isn’t the same as a traditional framework.”

Seguin said: “The challenge for investors is they require operational due diligence, and that means recruiting staff and recruiting reputable service providers.”

Robinson said it is a sign of the maturity and development of a market that people now want to “put rules and regulations around it.”

Reflecting on how the market’s potential future direction of travel may impact the broader hedge fund industry, he noted: “The future talent pool is at these hedge funds and trading houses, in their late 20s and 30s, cutting their teeth on crypto. This space isn’t just about making money and investing in anti-fiat, it’s also about learning and finding out where the talent pool is for the future as well.”

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Hugh Leask
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