June 14, 2022

Dauntless Allocators Stick With Calamitous Cryptocurrency

Institutions keep their toeholds in bitcoin and others amid epic market slide.

Reported by Larry Light

What does it take to hold onto investments in cryptocurrency right now? Belief in its future, at a time when many are questioning whether it has one. Long-term-oriented institutional investors with holdings in crypto don’t appear to be cowed by the latest grim news about digital money.

Crypto seems headed for the crypt, judging from its latest plunge. Bitcoin, crypto’s largest denomination, lost 15% on Monday, continuing a rout that started in November 2021, when the coin peaked. Since then, it has shed around two-thirds of its value, and now costs just over $23,000.

The carnage is widespread. The second largest cryptocurrency, ethereum, has a similar depressing descent. Crypto lending company Celsius said Monday it would halt withdrawals “due to extreme market conditions.” In May, UST, a so-called stablecoin that’s pegged to a $1 value, plunged to nearly nothing, where it has stayed, according to the Coinbase crypto exchange.

But institutional investors, particularly university endowments, are buying the stuff as long-term investments, albeit cautiously as they assess its potential. While no stats are kept and many asset owners don’t disclose the particulars of their portfolios, it’s clear that they want to buy at least a smattering of crypto, despite the drubbing it has taken in recent months.

Institutions don’t announce they are dumping an asset class. But several financial strategists who work with them and fund officials on background say no exodus is planned. “We’re not that heavily into crypto and think this problem will blow over,” says a person with one institution. “Investors are looking for new technologies,” even if crypto is volatile, says Matthew Sigel, VanEck’s head of digital assets.

Interest in crypto remains strong, if limited. “This is increasingly a hot topic” among institutions, says John Bowman, executive vice president of the Chartered Alternative Investment Analyst Association, referring to making crypto investments. A Morgan Stanley note says institutions now outnumber retail investors in crypto trading.

Volatility seems to be a hallmark of bitcoin and its ilk. A bunch of institutions are not dissuaded by crypto’s current travail, though. “I figure this is my third crypto winter,” Fidelity Investments CEO Abby Johnson told a conference last week, per research site CoinDesk. Her company is the nation’s largest 401(k) provider, and its platform allows people to add crypto to their accounts. “There’s been plenty of ups and downs, but I see that as an opportunity.”

Damn the Torpedoes

The case against crypto centers on its lack of regulation and the absence of traditional assets backing it up. Sure, the U.S. dollar is no longer supported by gold. Yet Washington’s taxing power over the largest economy on earth undergirds the greenback.

“An asset needs a clear regulatory framework, it needs to be an effective store of value, and it needs to have a predictable correlation with other asset classes,” wrote PGIM CEO David Hunt in an analysis by the money management firm. “Cryptocurrency currently meets none of these three criteria. It’s much more of a speculation than an investment.” Among digital assets’ other critics are JPMorgan CEO Jamie Dimon, who called crypto “worthless,” and uber-investor Warren Buffett, who dubbed it “rat poison squared.”

But Ric Edelman, founder of an advisory firm now called Edelman Financial Engines, is a staunch crypto proponent who disparages the naysayers. “They can’t understand how to value it because they are ingrained with traditional methodology,” says Edelman, who launched an advocacy group called the Digital Assets Council of Financial Professionals.

The legacy Wall Street crowd, he argues, sees crypto as “an existential threat,” much as Netflix was to the late video rental chain Blockbuster. “Dimon is fearful that crypto will render his bank obsolete,” Edelman charges. He notes that one-time tech high-fliers Apple and Amazon have taken bad tumbles, too. “You don’t see anyone saying get out of stocks or tech,” he adds.

VanEck’s Sigel sees endowments and foundations as the most receptive to investing in crypto due to the payments they garner in the currency, something pension funds don’t receive. “This is an asset for youth” used to playing video games, he observes. “It has the most freedom from regulation,” a plus with the young.

Indeed, the money inflow to endowments and foundations tends to be from individuals with their own particular preferences—students, alumni, rich families. Pensions often depend on contributions from their sponsors; public pension programs must answer to various constituencies and politicians, and corporate pension plans are overseen by company managements. While laws and regulators are powerful influences upon pension funds, endowments and foundations are largely free from those forces.

Crypto Compatriots

Some 13% of U.S. endowments and foundations and 3% of pension funds have bought crypto, according to Fidelity’s 2021 Institutional Investor Digital Assets Survey.

Yale, Harvard, Brown and the University of Michigan are among the group of colleges that have bought crypto since at least 2021, says CoinDesk. Previously, Yale and a few others reportedly invested in providers of blockchain technology, crypto’s infrastructure. The universities wouldn’t comment or did not return requests for comment.

Much of the institutional crypto exposure is confined to limited partner positions in private equity and venture capital funds that make direct investments in virtual currencies. In April, for instance, the Teacher Retirement System of Texas plugged $20 million into 10T Holdings, which focuses on digital assets.

Part of this dynamic is that numerous endowments and foundations accept crypto donations, according to the Giving Block, a crypto contribution service, and it makes sense to them to recycle the proceeds into portfolio additions. They include the California Institute of Technology, Catholic University of America, Fred Hutchinson Cancer Research Center, Haverford College and Pepperdine University. The universities did not return requests for comment.

Plus, a number of schools accept digital money for payments such as tuition and gifts, says higher education publication University Business. Among them are Penn’s Wharton School of Business, the University of California at Berkeley, Lehigh and Carnegie Mellon. They couldn’t be reached.

Even more schools are eyeing accepting crypto. “Anecdotally, we are hearing about institutions exploring the acceptance of cryptocurrencies as gifts or for payments,” says Liz Clark, vice president, policy and research, at the National Association of College and University Business Officers.

Adoption of crypto has been slower to catch on among pension funds. Two Virginia pension programs, the Fairfax County Employees’ Retirement System and the Fairfax County Police Officers Retirement System, are exceptions. They invest in several crypto funds. The county workers’ plan, for instance, focuses on the infrastructure of digital assets. The police program is in bitcoin fund Morgan Creek Digital Fund.

In 2019, the Santa Clara Valley Transportation Authority’s plan allocated up to 3% of its portfolio to bitcoin. At the time, bitcoin had a low correlation to other assets in the fund, so it was a good diversifier, recalls its former CIO Sean Bill. That trait, however, has faded lately, as crypto has tanked along with other traditional assets.

What hasn’t faded is the fascination it inspires among devotees. Bill finds bitcoin is “a store of value, like digital gold. Both bitcoin and gold have a limited supply, are impossible to counterfeit, and are convertible into fiat currency anywhere in the world. The ability to transfer value digitally makes bitcoin more attractive than gold.”

One telling irony: Although Dimon and Buffett disdain crypto, they realize it is sufficiently viable to do business in digital denominations. Last summer, JPMorgan began offering wealthy clients access to six crypto funds. And Buffett’s Berkshire Hathaway this winter invested $1 billion in a Brazilian digital bank that specializes in crypto. So much for “worthless” and “rat poison squared.”