Bitcoin's meteoric rise to 6000 dollars and beyond (all-time high at $6216) in the last few weeks have apparently caught the eye of investors and media outlets. But many believe that mainstream investors are still keeping clear of the cryptocurrencies leader. This article might explain why.
In an article published by Reuters on October 23, the authors acknowledge the rapid growth of Bitcoin’s value as well as the fact that the cryptocurrency market capitalization has exceeded $170 billion. But they are fast to note that “mainstream institutional investors” are staying clear of the crypto market. They attribute this to light regulations, volatility and illiquidity.
Although we are in 2017, Bitcoin is described by some investors as “opaque” and “esoteric” which is used by “gun-runners” and “drug-dealers”, thus it should be avoided.
Small hedge funds - limited track record
Despite the understandably negative view by some investors, the authors mention that newly created cryptocurrency hedge funds exist to help investors become familiar with the nascent market and invest in. An interesting statistic is referenced: In 2017, there have been launched 84 new crypto hedge funds. There are now 110 such crypto funds which have 2.2 billion dollars in assets.
The problem is that most of these hedge funds are still small with a limited track record, a fact that deters institutional investors such as pension funds and insurance companies from entering the cryptocurrency market. Lex Sokolin, a financial tech researcher, is quoted saying that of all 110 crypto funds only a couple of them worth several hundred million dollars while the value of most others is from $5 million to $20 million. Institutional investors would not invest in such small hedge funds, because of their liquidity.
The article goes on to cite concerns about determining the real value of bitcoin and cryptocurrencies in general. Given the fact that there are almost 17 millions of bitcoins in circulation and the total supply will never exceed 21 million, a question is raised about the price stability of assets, as sentiment often determines their price. This issue echoes another argument against Bitcoin that its price is just what another wants to pay for it.
Investors need the right vehicle
Nevertheless, all these concerns might be natural to Bitcoin being in its early days. As it happened in the hedge fund boom in the early 1990s, it might be that only high-net individuals, companies managing rich families money and private wealth managers are investing in Bitcoin for now.
If cryptocurrencies have the same trajectory as hedge funds, then it is only a matter of time for institutional investors to invest themselves in the market. They just need to find the right vehicle.