Institutional investors were upset with cryptocurrencies even before this week. The sudden crash of Sam Bankman-Fried’s FTX.com may have permanently damaged their prospects of being included in the top portfolios.
While many industry die-hards remain, many professional money managers say the case for cryptocurrency as a portfolio diversifier or digital gold has been discredited. The losses are too big and the market structure is too risky, they say.
“What became clear is that it will not find a home in institutional asset allocation,” said Hani Redha, a multi-asset portfolio manager at Pinebridge Investments in London. “There was a period where it was looked at as a potential asset class that every investor should have in their strategic asset allocation and that’s completely off the table.”
The implosions and scandals of the past few months have swept away the key arguments of cryptocurrency promoters and all but erased the notion of Bitcoin as a safe haven in turbulent times. But none of those events, from the collapse of TerraUSD to the bankruptcy of Celsius, were as damning as the revelation that even FTX, until recently considered one of the biggest names in crypto, was not rock solid.
FTX’s collapse is “raising questions about the viability of the crypto ecosystem,” said Salman Ahmed, chief investment strategist at Fidelity International, which oversees $646 billion from London. “It was always difficult to make the case for including crypto, but the setup has come under more pressure.”
His company launched an exchange-traded Bitcoin product in February, aimed at European professional investors. It has lost about 55% since its creation.
Just a year ago, crypto mania was at its peak and Bitcoin had surpassed $67,000. In January, Bridgewater estimated that 5% of Bitcoin was held by institutional-level investors.
Sparkling predictions were everywhere back then. JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou wrote that, in theory, Bitcoin could reach $146.00 in the long term, displacing gold. A survey conducted by PWC in April found that 42% of crypto hedge funds predicted that Bitcoin would trade between $75,000 and $100,000 by the end of 2022.
Now the opinions among investors are more restrained. Panigirtzoglou said in a report this week that Bitcoin could return to summer lows of $13,000. Bitcoin traded below $17,000 on Friday.
“The argument of investing in cryptocurrencies as a diversification died some time ago,” he said in an interview.
Bitcoin has crashed and recovered before. Some believers see the arrogance in the marketplace being removed, which will eventually put the industry on the path to maturity. FTX issues can actually benefit established companies with a history of risk management, such as Nasdaq Stock Market and CBOE Global Markets Inc., Morgan Stanley analyst Mike Cyprys wrote.
However, for Mark Dowding, chief investment officer at BlueBay Asset Management, the case for Bitcoin becoming a version of digital gold is false. It is only a matter of time until even more investors drop out and cryptocurrency prices fall again, he said.
“It should have been clear that an industry that produced nothing, burned cash and offered attractive returns, was doomed to fail,” he said.