Asset owners sound cautious note on crypto
As one of the most newsworthy assets during the past few years, cryptocurrency has gained attention for providing stellar returns but also for suffering steep losses. While crypto asset managers share a positive outlook for digital assets, institutional investors and advisors are less sanguine and more wary.
Speaking at FT Live’s recent Future of Asset Management conference, Matt Shapiro, partner at Multicoin Capital, said cryptocurrency has the freedom to adapt and become increasingly valuable, especially in a down market, because it is not tied to a national currency or market.
Regarding the extreme volatility of the asset class, he said that because crypto is relatively new, there are going to be cycles of popularity and seeming disinterest, which he referred to as “hype-cycles”.
“It’s going to have a similar adoption curve to the internet,” he said.
Conference speakers were mostly positive on the outlook for cryptocurrencies. They highlighted a need for education among investors to ensure a commonality in definitions and to eliminate the perceived regulatory risk of investing in cryptocurrencies.
Despite the overall positive views of crypto asset managers, many pension funds are still not sold on cryptocurrency as an asset class, but investing in blockchain technology within venture capital holds some interest for investors.
Crypto losses
Perhaps the most notable loss in returns from a cryptocurrency investment was made by the C$392bn ($298.2bn) Caisse de dépôt et placement du Québec. Chief executive Charles Emond said the fund is, “not interested in further crypto investments,” after writing off a $150mn investment in cryptocurrency platform Celsius Network.
The initial investment in Celsius, a global cryptocurrency earning-and-borrowing platform, took place in partnership with WestCap, a growth equity firm, in October 2021 according to CDPQ’s website.
“You know, in these disruptive technologies, there’s ups and downs.”
The transaction left Celsius with a valuation of more than $3bn and a plan to “use the proceeds… to continue expanding its offering and products, as well as building bridges between traditional finance and cryptocurrencies, with specific emphasis on launching institutional-grade products and offerings.”
Ten months later, Celsius announced it had paused all withdrawals, swaps and transfers between accounts on June 12 2022 due to “extreme market conditions,” according to its website.
The company filed for chapter 11 bankruptcy in New York on July 13, revealing liabilities exceeding assets by more than $1bn.
At CDPQ’s mid-year review in August, Emond said, “For us it’s clear when we look at all of this, even if the last chapter has not been written, that we went in too soon into a sector that was in transition, with a business that had to manage extremely quick growth,” according to an article published in the Financial Times.
A spokesperson at CDPQ confirmed to MandateWire that the fund is not interested in further cryptocurrency investments, but said it remains hopeful about the future of cryptocurrencies.
“You know, in these disruptive technologies, there’s ups and downs,” Emond said during the mid-year review.
Another Canadian pension plan, the C$242.5bn ($177.5bn) Ontario Teachers’ Pension Plan, also made a recent loss in cryptocurrency. The pension plan invested an undisclosed amount into FTX – a cryptocurrency exchange – and other funds in October of 2021.
The investment was made through OTPP’s Teachers’ Venture Growth platform, which “focuses on growth equity and venture capital investments in companies, such as FTX, that are using technology to shape future markets,” according to OTPP last year.
FTX announced on November 8 2022 that Binance Holdings Ltd. bought the company after facing what Binance called a “liquidity crunch.”
Other tokens such as bitcoin plunged to multiyear lows as investors rushed to exit the digital asset market after the news from FTX broke.
“While there is uncertainty about the future of FTX, any financial loss on this investment will have limited impact on the Plan, given this investment represents less than 0.05 per cent of our total net assets,” a statement from OTPP says.
Other pension funds have held educational sessions on cryptocurrency, but many have stopped short of investing in these digital assets.
The $1.1bn Merced County Employees' Retirement Association heard a presentation from consultant Cliffwater in March 2022 on cryptocurrency investing. However, on November 1 2022, Kristen Santos, the retirement plan’s administrator, told MandateWire, “Merced CERA does not invest in cryptocurrency and just asked for [information] for educational purposes. Currently there are no plans to invest in crypto.”
Some funds have decided to invest in blockchain technology as part of their venture capital investments.
The $3.3bn Fairfax County Employees Retirement System released a statement to its pension holders explaining its $21mn investment into the Morgan Creek Blockchain Opportunities Fund.
The fund explained that its investment is different from an investment in bitcoin. “At least 85 per cent of the Morgan Creek Blockchain Opportunities Fund will be invested in blockchain technology firms,” the release states. “As such, this is very similar to other private equity investments made by Fairfax’s three retirement systems. No more than 1 per cent of the funds will be invested in actual cryptocurrencies and to date, the fund has no exposure to any cryptocurrencies.
Consultant perspective
Alison Adams, a consultant at Meketa, tells MandateWire that after becoming informed about investing in cryptocurrencies, many pension funds ultimately decide not to follow through with an investment in the asset class due to the volatility of the crypto market.
“Bitcoin is not backed by anything so it fluctuates a lot,” she says. “I don’t see how bitcoin is better than [a security backed by] the full credit of the US government.”
She explains that traditional assets are backed by a national currency, so the value of the asset stays relatively consistent. Because bitcoin or other cryptocurrency coins vary in backing, their value fluctuates more frequently and with larger swings in value. For many investors, the risk of investing in an asset that is so unstable is too great.
“Bitcoin is not backed by anything so it fluctuates a lot,” she says. “I don't see how bitcoin is better than [a security backed by] the full credit of the US government.”
Additionally, there are aspects of cryptocurrencies, such as benchmarking, that are not solidified yet, presenting another roadblock for investors.
“There are questions that need to be worked out in a systematic way,” she says. Despite this, Adams notes that some pension funds do have venture capital allocations specifically for blockchain technology in their portfolios. “It’s a promising technology; peer to peer payment is good from the VC perspective,” she says.
Meketa has been monitoring crypto as a potential investment since 2016, but it was not until the asset class hit more than $1tn in the beginning of 2020 that it garnered investor interest.
Chris Walvoord, global head of alternatives portfolio management and research at Aon, tells MandateWire that pension investors have “consistently enquired” about cryptocurrency, but have yet to make an investment in digital assets.
That cautious approach, Walvoord says, is partly due to Aon’s asset allocation team struggling to develop a “use case” for a direct investment into crypto.
He says, “If you don't have a use for them, it's hard to fit them into an asset allocation.”
As with Adams, volatility in the crypto market is also the reason Walvoord's team is not recommending crypto investments to pension plans. Blockchain investments, he says, are more commonly recommended, as the “use metric” is apparent. One example he highlights is traders using blockchain technology to increase trade speeds and transparency within stock trading.
“You can see how much quicker these companies can trade through using blockchain. The tech component is more interesting than a direct investment into the market,” he says.
Aon has been monitoring cryptocurrencies since 2019 and published its first market report in 2020.
Although many asset owners are skeptical of cryptocurrency, a study released this month by London-based asset manager Nickel Digital Asset Management reveals positive feedback from professional investors.
The study found that 92 per cent of 200 professional investors surveyed across seven countries agree that, “current valuations of assets such as bitcoin and ethereum are very attractive for investors taking a five year review.”
Seventy-two per cent of survey respondents said that overall returns on the digital assets in the funds they manage are “positive,” with 24 per cent saying returns are “very positive.” Just 6 per cent said they have made a loss while 12 per cent "are around break even."
“The crypto market has suffered a massive sell-off, with asset prices dropping substantially, which has inevitably resulted in investors reducing their allocation to lower risk.” Charles Adams, investor relations at Nickel Digital said.
“However, it is clear that professional investors recognize the long-term value of digital assets,” he continued.
