This week, two public pension funds, a hospital, a university endowment, and an insurance company invested in Morgan Creek’s crypto fund. Following the deal, Digital Currency Group CEO Barry Silbert said the U.S. pension fund market is $25.4 trillion.
U.S. pension funds manage $25.4 trillion https://t.co/TWinBGulwO
— Barry Silbert (@barrysilbert) February 12, 2019
For years, prominent investors such as billionaire hedge fund legend Mike Novogratz have emphasized that pension funds are typically extremely cautious in investing in a new asset class.
Investors stated that once the first wave of pension funds invest in the crypto market, it may lead the rest of the U.S. pension fund to enter the digital asset sector.
“What is going to happen is, one of these intrepid pension funds, somebody who is a market leader, is going to say, you know what? We’ve got custody, Goldman Sachs is involved, Bloomberg has an index I can track my performance against, and they’re going to buy. And all of the sudden, the second guy buys. The same FOMO that you saw in retail [will be demonstrated by institutional investors],” Novogratz said.
First Case of Institutionalization of Crypto
Earlier this month, Pathfinder Venture Capital chief investment officer Ari Paul said that a variety of factors have slowed down the institutionalization of crypto.
Institutions were reluctant toward investing in the cryptocurrency sector due to an ambiguity in regulatory frameworks surrounding the asset class and the lack of adoption of crypto assets.
Generally, Paul explained that institutional investors consider cryptocurrencies as one of the three: a venture capital opportunity, hedge against the global economy, and an asset class for active trading, and cryptocurrencies had not appealed to institutions in all three categories until recently.
“For a. VC – investors want to see more coherent models for valuation and some success cases with real user adoption.
For b. Crypto as money or hedge, they want to see a pretty looking chart or at least consolidation, and stronger network effects (waiting on other institutions.). Also want statistical evidence of it hedging fiat.
For c. Active trading or profits from providing services, they want to see more traditional institutions getting in to have confidence in long-term plan and better regulatory clarity around provision of services.”
While the global awareness of cryptocurrencies has surged noticeably in the past few years, the growth of the infrastructure supporting the asset has not increased as fast, relative to its awareness and overall adoption.
The infrastructure of the cryptocurrency exchange and over-the-counter (OTC) markets experienced exponential growth beginning in late 2018 with the involvement of Fidelity, Nasdaq, and ICE.
Some have said that companies have seen more progress in institutionalizing the cryptocurrency market in the last five months than in the last five years.
Prior to that, the cryptocurrency market lacked trusted custodians and regulated investment vehicles.
Will More Institutions Invest?
Prominent executives at major investment firms have consistently said that while institutional investors like pensions and endowments are cautious with their investment approach, once several are committed, the rest come into the market.
As Ari Paul noted:
“These things almost always follow a hockey stick kind of chart. Lots of slow building of a base of understanding and institutional buy-in, then a sharp ‘follow the leader’ effect.”
This morning our team at Morgan Creek Digital announced a new $40 million crypto venture fund anchored by two public pensions.
The institutions aren’t coming.
They’re already here. ?
— Pomp ? (@APompliano) February 12, 2019
Analysts foresee the first group of institutions that invested in the $40 million crypto fund of Morgan Creek leading the rest of the U.S. pension fund market to commit to the asset class in the months to come.
Feated Photo by Niels Steeman on Unsplash