BlackRock moves into bitcoin as institutional cryptocurrency investment takes off

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BlackRock is opening two of its funds to the possibility of investing in bitcoin futures, signalling mounting interest from institutional investors in crypto markets, which started the year with an all-time record USD1 trillion total value.

Bitcoin derivatives registered on commodity exchanges will become eligible investments for the BlackRock Funds V and Blackrock Global Allocation Fund, according to the USD8.7 trillion asset manager’s filing with the US Securities and Exchange Commission this week.

BlackRock’s CEO Larry Fink has recently sounded increasingly positive about bitcoin, saying in December: “Can it evolve into a global market? Possibly.” He also added that having a digital currency makes the “need for the US dollar to be less relevant”.

The price of bitcoin has fallen by 16 per cent in the last week, tumbling off its record high of over USD40,000. The cryptocurrency’s value previously doubled between December and January, boosted by fast-growing institutional investment in response to coronavirus-related economic turmoil.

The trend of high-profile asset managers buying into digital assets picked up pace dramatically in 2020, with the traditionally defensive Ruffer Investment Company placing a GBP550 million stake in Bitcoin in November. 

In a recent portfolio update, the UK-based investment company said that it believes bitcoin is “poised for a wave of mainstream institutional adoption”. 

Ruffer says the macroeconomic outlook of negative interest rates, extreme monetary policy, ballooning public debt, and “perilously” high prices for traditional safe-haven assets are all points in favour of adopting cryptocurrency.

“The coming together of a fragile monetary system, distorted financial markets and investors’ hunger for safety could trigger a surge in demand for Bitcoin as a store of value. Mainstream adoption by financial institutions could be around the corner, with bitcoin becoming an alternative to gold and government bonds,” notes Ruffer.

Investment flows have already been surging, according to digital currency asset manager Grayscale, which managed to grow more than 10 times in size over the course of 2020. The firm, which runs the Grayscale Bitcoin Trust, went from USD2 billion to USD20.2 billion in assets under management by the end of 2020.

Institutional investors were responsible for an overwhelming 93 per cent of Grayscale’s capital inflows, and the size of these allocations is rising rapidly. According to the company’s fourth quarter update, the average institution committed USD6.8 million, more than double the figure for the previous quarter.

“The career risk of allocating to bitcoin has turned into the career risk of being a laggard,” comments Grayscale.

Exchanges are also preparing for surging investment in digital assets. US-based Kraken, the largest cryptocurrency exchange by euro trading volume, recently moved to take advantage of a “critical tipping point” in the industry by doubling the number of trading pairs available in both UK sterling and the Australian dollar.

“The digital currency industry is at a critical tipping point as institutional investors start to allocate into the asset class,” says Jonathon Miller, Kraken’s managing director of Australia. 

A recent survey of institutional investors by Evertas has found that a quarter believe that their cryptocurrency allocations will rise “dramatically” in the next five years, with a further two-thirds agreeing that there will be some rise. 

However, the survey also found that a lack of insurance cover for crypto assets and concerns over compliance procedures still loom large in the minds of would-be investors.

Ruffer stressed that many of the impediments to institutional investment in cryptocurrencies have been dismantled, due to rapid recent improvements in digital infrastructure. 

Security, which is often a concern with digital assets, has improved to the point that “nobody at Ruffer can access the bitcoin”, according to the firm. 

Ruffer says the investment is held in offline, cold storage by an independent qualified custodian and a fiduciary under New York state banking laws and is covered by an “industry-leading insurance policy”.

Moreover, the company argues that the move into bitcoin helps diversify its much larger investments in gold and inflation-linked bonds. “Today, we see bitcoin as a small but potent insurance policy.”

The firm has been using “unconventional” sources of protection for its portfolios for some time, such as its defensive holdings in yen and the Swiss franc that helped drive strong gains for its portfolios during the credit crisis in 2008. “These holdings were sometimes unpopular, but ultimately proved their worth,” says Ruffer.

As institutional investors continue to place bets, Grayscale believes that the next frontier of crypto investment will be nation states adopting digital currencies into their national banking infrastructures.

Central bankers have been reluctant to engage with digital assets in the past. 

European Central Bank President Christine Lagarde recently dismissed bitcoin as a currency, stating that “this is a highly speculative asset, which has conducted some funny business and some interesting and totally reprehensible money-laundering activity”.

On Tuesday, US Treasury Secretary-nominee, Janet Yellen, suggested that regulators should attempt to "curtail" the use of cryptocurrencies for illegal activities.

In the UK, the Financial Conduct Authority (FCA) has also stated that consumers who invest in cryptocurrencies “should be prepared to lose all their money”. 

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Madeleine Taylor
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