Are Institutions Investing in Crypto Portfolios?

English

14 Dec 2023

Institutional investors, including pension funds, government-linked investment companies, high-net-worth individuals, and even publicly listed companies, increasingly turning their attention to crypto portfolio allocation. This growing trend suggests a shift towards diversifying institutional investment portfolios beyond conventional financial products and incorporating digital assets as a norm.

“This Time is Different”

We first heard the moon phrase from 2017 and it never faded away.

The infamous "This Time is Different" echoes in the cryptosphere, often whispered on the precipice of bullish cycles. But is this time truly distinct? Let's delve into how various institutions are approaching crypto exposure, mapping out potential paths for your own portfolio.

Pension Funds & Plans: Cautious Entry, Growing Confidence

A 2023 survey reveals 90% of pension funds are considering investing in digital assets. 21% envision allocations up to 4%, while 18% aim for 5%. Notably, 41% anticipate their clients holding 5-10% of assets in crypto within three years.

Taking action, Fairfax County’s Virginia's Police Officers Retirement System and Employees' Retirement System Pension Fund combinedly invested $50 million in Morgan Creek Digital, targeting early-stage blockchain infrastructure. Their annual report shows a conservative 3.6%-6.5% allocation to private equity and 1% to private credit for digital asset exposure.

Individual private equity investments rarely exceed 0.1% of a portfolio. Temasek and Ontario Teachers' funds, despite incurring complete FTX write-offs, suffered losses of 0.09% and 0.05% respectively, showcasing how strategic, low-key crypto allocations can mitigate risk.

Even financial giants like Fidelity are cautiously dipping their toes in, offering a crypto investment account for 401(k) plans with a recommended 5% allocation, capped at 20% of the individual's balance.

Family Offices & HNWI: Diversification Down Under

A KPMG survey suggests 60% of family offices and high-net-worth individuals (HNWIs) allocate less than 5% to crypto, while 54% aim for 5-30% exposure. These figures highlight a growing openness among HNWI towards diversifying their portfolios with digital assets.

Whampoa Group, a notable example, raised $50 million for a crypto-related hedge fund and $100 million for crypto-focused venture capital investments, demonstrating the increasing appetite for diverse crypto plays within this investor class.

Corporations Crypto Investment: Taking the Plunge

Some corporations are blazing the crypto trail. MicroStrategy, leading the charge, held 72% of its assets in Bitcoin at Q3's end (now ~86%), exhibiting unwavering conviction. Tesla, although a smaller player, held 1% of its cash in Bitcoin as of Q3.

In a recent move, Boyaa Interactive, a Hong Kong-listed gaming company, announced plans to invest up to $100 million in crypto assets within a year, illustrating the expanding corporate engagement with digital currencies.

Source: Coingecko

Expert Opinions: BTC and Crypto Allocation Investment

Financial institutions are also chiming in on optimal crypto allocations. VanEck recommends 3% Bitcoin for portfolio performance optimization. Ark Invest, a pioneer in disruptive innovation, predicts institutional allocations of 1%-6.5% in Bitcoin by 2030.

Academic research backs these recommendations. A CFA Institute Research Industry study found a 2.5% quarterly rebalanced Bitcoin allocation significantly improved portfolio returns between 2014 and 2020. A Yale economist even suggests 6% for optimal portfolio construction.

Further research, using the Markov regime framework, pinpoints 5% as the ideal crypto allocation within portfolios. Monte Carlo portfolio optimisation, analyzing combinations of assets under various market scenarios, reveals that a portfolio mix of 56.59% equities, 20.75% bonds, and 22.66% Bitcoin delivers the highest Sharpe ratio (a risk-adjusted return measure).

Conclusion: Navigating Your Crypto Journey

The evidence is clear: large corporations are entering the crypto scene, and institutions are increasingly recommending digital asset inclusion in portfolios. This time, indeed, seems different.

So, where do you stand? Based on the data and expert opinions:

Ideal allocation: Aim for 5-10% of your portfolio for moderate exposure.
Sophisticated investors: Consider exceeding 20% with careful research and risk management.
Skeptical investors: Allocate at least 1% for portfolio diversification.

Connect with ChainUp Investment to learn more.

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