Bitcoin isn’t a joke anymore, not for these investors anyway
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Cryptocurrencies are likely to struggle to be accepted as a ‘serious’ investment as memories of the massive boom and bust of 2017/18 remains foremost in people’s minds.
But institutional backing has started and Apollo investment manager Henrik Andersson says trading volumes of cryptocurrencies on regulated exchanges, such as CME, have “skyrocketed”, indicating rising activity from bigger players.
“The CME is a regulated market accessible to institutions, and the volume is so much larger since the start of the year, this indicates to us that it’s not just retail investors,” he said.
“The aggregated open interest in Bitcoin futures is around $5bn, which is doubled what it was at the start of 2020.”
It is a high-risk, high-reward game.
The Apollo fund returned just under 30 per cent in 2019, a year when the broader crypto market, worth about $300bn, was down.
The long-promised institutional involvement in cryptocurrencies, rebranded for a more cautious market as ‘digital assets’, properly began at the end of 2019 after months of delays.
The New York Stock Exchange (NYSE) launched its Bakkt exchange, a secure marketplace for institutions to trade in Bitcoin derivatives, in September.
Futures contracts for Bitcoin on the exchange are trading between $US10,695 ($15,916) for March contracts to $US10,990 for June contracts, hinting at where buyers believe the price of the currency is heading.
On Thursday morning Bitcoin was trading at $US10,439, up 27 per cent over the last month.
Fidelity Digital Assets, the crypto arm of the global fund manager, began actively operating late in 2019 and this year moved to offer custodial services for European institutional and sophisticated investors in Bitcoin as well as digital assets backed by metals.
And Nomura, a Tokyo-based management consultancy and research firm, received approval in November to use its custody and depositary services for cryptocurrencies.
These organisations are creating structures and processes around cryptocurrency trading that are the same as those for traditional investments, making the sector familiar to traditional investors.
Andersson says the Apollo fund received an investment from a Sydney fund of funds, which he declined to name.
“We have seen crypto assets and bitcoin being the best assets for returns in the past seven out of 10 years,” he said.
“For institutional investors, the crypto markets have been uncorrelated to other markets, which makes it very attractive.”
Pure cryptocurrencies such as Bitcoin or Ripple have suffered from a use-case dilemma: what do you use it for? Is it an investment like in gold — a store of value? Or can it have real-world uses, so is it like a forex play?
Those cryptocurrencies can be used in the real world but rarely are they regularly used for legitimate purposes.
Andersson says funds are treating Bitcoin at least like gold.
“Bitcoin behaves like a high beta gold and I think there’s a narrative building around it as digital gold,” he said.
“Bitcoin is becoming more scarce as well. In May this year the supply will be cut. That could be another trigger for the bitcoin market.”
Others, such as Synthetix out of Sydney, were launched with a use in mind and their value is linked to how much it’s used for that purpose.
Symthetix operates in the decentralised finance market, or ‘de-fi’, where applications are built on the smart contract platform Ethereum and offer financing like lending, derivatives or synthetic assets.
The Sydney outfit offers tradable tokens that represent assets such as metals or shares, which can be traded on its exchange.