As news circulates that indexing giant BlackRock is reorganizing itself with an emphasis on higher-fee alternative assets, a few are beginning to believe that bitcoin could ultimately find its place among these nontraditional assets.
Change comes slowly to institutional investors like pensions funds. In the 1950s and 1960s, pensions mostly shunned stocks in favor of bonds. Today, virtually every retirement account has an equity allocation. Pensions, insurance companies and endowments have become huge buyers of riskier exotic investments, from hedge funds and private equities to global real estate, commodities and venture capital. Since 2008, U.S. pension fund investments in alternative assets have ballooned from 7% to 20% of total assets, reaching $7.6 trillion in 2017.
On Tuesday, BlackRock, the largest asset manager in the world with $6 trillion under management, said it would undergo a massive management overhaul, in part reorganizing to focus on alternative investments. And while BlackRock declines to comment on any plans for large forays into crypto assets, it recently hired former Ripple product marketer Robbie Mitchnick to its Digital Wealth team, which uses the firm’s successful Aladdin global asset management software to build institutional portfolios. Last summer, Mitchnick and Stanford Business School professor Susan Athey published a paper called “A Fundamental Valuation Framework for Cryptoassets,” which essentially laid out a sophisticated model for valuing cryptocurrencies bitcoin and XRP.
As an alternative asset, the appeal of crypto is that its movements are uncorrelated with the rest of the market, says Mark Yusko, CEO of Morgan Creek Capital Management, which oversees $1.5 billion in assets, including a $40 million blockchain-focused VC fund. “Stocks or bonds derive their value from factors like GDP growth, profitability and interest rates. A cryptocurrency network derives its value from usage growth, adoption, regulation and technology. All of those things are uncorrelated with traditional measures of stocks and bonds.”
Jennifer Campbell, co-CEO of digital asset trading platform Tagomi, isn’t seeing institutional investors flock to the space yet. But signs are dribbling out. In February, two Virginia pension funds, including a police fund, invested in crypto. The University of Michigan’s endowment announced it had invested $3 million in Andreessen Horowitz’s crypto fund.
Yusko claims inbound interest from institutional investors is growing. This week, he’s meeting with a California municipal pension fund. He adds that more institutional-investor conferences are including talks on cryptocurrencies.
Teddy Fusaro, chief operating officer of Bitwise, a San Francisco digital asset manager and creator of the first crypto index fund, says institutional investors are showing increasing sophistication. “A year ago,” he says, “the conversation might have been, ‘How do we know bitcoin is going to survive?’ Or ‘Who is the CEO of bitcoin?’ Today, investors ask questions like, ‘How are blockchains going to solve scalability issues? How will they get broader adoption?’” Over the past six months, Bitwise has seen more money flow into its funds than out, says a person familiar with the matter (Bitwise declined to comment).
Bitwise is trying to draw more institutional investors into the market by launching a cryptocurrency ETF. Other companies like VanEck and the Winklevoss brothers’ Gemini have tried to do the same, but the SEC hasn’t approved the new security yet. In March, Bitwise took a creative approach to make its case. It published a 226-page research report indicating that the size of the bitcoin market is 95% smaller than what’s widely reported on sites like CoinMarketCap—about $270 million in daily trading volume versus $6 billion.
With its report, Bitwise aims to address one of the SEC’s concerns: the question of whether a regulated crypto market of significant size already exists. The CME Group’s market for bitcoin futures is regulated and trades about $90 million daily, so Bitwise argues that a $90 million market is a significant size relative to the $270 million total bitcoin market.
Bitcoin’s price has appreciated nearly 30% year-to-date, compared with about 15% for the S&P 500. ProShares Morningstar Alternatives Solution ETF is up 2% so far this year.