Family Offices Likely to Invest in Bitcoin; Don't Count on Banks - Coinbase Analyst
Institutional investors are far from homogenous and while some have already invested in cryptoassets others may never do this, Nick Prince, Financial Strategy Analyst at major crypto exchange Coinbase, said. Family offices are the most likely to invest in crypto, and banks/insurance companies the least, he added.
In his recent blog post, Prince listed types of institutional investors in order of likelihood to invest in crypto, from most to least likely. The analyst said that the post was written while he still worked at the Santa Barbara County Pension Fund in the US last fall and doesn't "incorporate any new information since I joined Coinbase."
Types of institutional investors in order of likelihood to invest
1. Family offices
Family offices are responsible for managing the wealth of individuals or families and, among the investment teams mentioned here, these get the least amount of public oversight. These investors are awarded an accredited or qualified classification due to their wealth, and this enables them to invest in private markets that regulators don't allow retail to enter. "With both the willingness and ability to invest in crypto," wrote Prince, "this group is a logical early entrant into crypto investing."
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2. Endowments and foundations
Endowments and foundations manage funds for organizations like universities and charities, and as such, they differ from banks or insurance companies in several vital points. Their investment programs are allowed more risk, portfolio managers have more freedom in what they can invest in, and funds can afford enough time to wait out the market fluctuations, while holding onto an investment longer, thus earning an illiquidity premium. These characteristics enabled investors to move into alternative assets "(realizing incredible returns over time)" and "have also enabled them to be early movers into digital assets, as evidenced by Yale, Harvard and other notable endowments all making allocations to crypto funds."
3. Pension funds
This "mythical unicorn of institutional investors" and "the proverbial pot at the end of the rainbow for HODLers" is a very diverse group. It may be a private corporation or a public entity of various sizes. "It is reasonable to expect pension funds to invest meaningfully into this asset class" before banks, insurance companies, and sovereign wealth funds, says Prince, but after family offices and endowments. Also, Prince argues that today exist compliant ways for a pension fund to invest in crypto. Furthermore, to the Cryptoverse these investors seem to be barely moving if at all, he says, but time and speed are relative. While the Cryptoverse is used to fast pace, to pension funds, theirs is likely just the normal speed of progress. "Appreciate this reality and continue to build, disrupt, and educate. Pensions will come, as they always do," said Prince.
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4. Sovereign wealth funds
This is a reserve pool that a government sets aside for investment, explained Prince, mostly present in countries rich in natural resources. He wrote that there is over USD 7 trillion, on the aggregate, of permanent capital "looking for a home," and expects that crypto will eventually become a home to this money. But at this point in time, the "market is still too small for these behemoths to meaningfully deploy capital."
Meanwhile, in April, Saudi Arabia’s sovereign wealth fund said they're "looking into any opportunity." However, a report by Bloomberg did not mention cryptoassets. The fund did not respond to our request for comment.
5. Banks/insurance companies
"Don’t hold your breath on banks/insurance companies putting bitcoin in their portfolios." wrote Prince. They use the liability driven investing (LDI) strategy - they have liabilities on their balance sheets (e.g. customer deposits or insurance policies), which are legal obligations, and their goal is to keep the value of the assets paired with liabilities. "Since the value of bank deposits and insurance claims are not likely to move in lockstep with that of Bitcoin, not only would these institutions not be interested in investing, they actually have strict investment policy constraints that forbid investment in something like bitcoin," concluded Prince.
Meanwhile, as previously reported, experts seem to agree with the idea that Bitcoin should spend less time proving itself. Crypto will tip and go mainstream once we build a product that people both want and can use, Lou Kerner, Partner at crypto advisory firm CryptoOracle, told Cryptonews.com right after “Black Thursday” when large professional and institutional traders accounted for the lion’s share of sellers. He added that this financial revolution is being led by people and organizations that do not ask permission. It's not being led by institutions. "Institutions will follow. Build great products. Everything will follow," he said.
I don’t think the conversation even started for most funds until the custody space grew up. Now they can decide on whether or not to invest based on investment risk (rather than operational), but yeah that’s not happening in the next few weeks— Nick prince (@Nick_Prince12) May 4, 2020