Institutional investors should invest in bitcoin, notes research

Mar 01, 2019
Emerging asset class has potential to cause paradigm shift, says Cambridge Associates

Institutional investors should look at investing in bitcoin and other crypto-currencies, according to research by Boston-based Cambridge Associates, which says the emerging asset class has the potential to cause a paradigm shift in the digital world.

This is in spite of last year, when investors watched as the price of various crypto-assets collapsed. The industry’s most famous digital asset, bitcoin, lost roughly three quarters of its value, sliding from more than $16,000 a coin to less than $4,000. The dramatic declines that swept across the crypto-space raised questions about the future of these assets and the blockchain technology that underpins them.

But in its latest research Cambridge Associates notes: ‘Looking across the investment landscape, we see an industry that is developing, not faltering. Blockchain technology introduces scarcity to the digital world, which can help innovators better monetize their work and foster innovation.

‘It offers the potential to streamline processes across any number of businesses, such as inter-bank settlement. It also holds the hope for a new, more decentralized version of the internet, where users can better manage their privacy. Although the crypto-industry remains in its infancy, we think institutional investors should begin exploring it.’

Describing crypto-activity as ‘frenetic’ in 2018, the report highlights that the industry witnessed large crypto-asset price swings, a surge in fund-raising and – importantly – structural developments. ‘Despite the challenges, we believe it is worthwhile for investors to begin exploring this area today with an eye toward the long term,’ notes the report.

The research finds that investment activity has picked up strongly. According to the New York Digital Investment Group, the number of blockchain-related software projects on GitHub – a popular online developer community – has risen by a factor of 10 in just the last three years.

A notable example of the pick-up in investment activity is Coinbase’s recent capital-raising: it raised $300 mn in a ‘Series E round’ at an $8 bn valuation having raised its ‘Series D round’ at a $1.6 bn valuation a little over a year ago. In its capital-raise announcement, Coinbase notes that the firm sees ‘tremendous promise in crypto to build the next great phase of the internet – often referred to as Web 3.0.’

Beyond investment activity, the Intercontinental Exchange has formed a subsidiary called Bakkt to start trading physically settled bitcoin futures in early 2019. This follows the December 2017 launch of bitcoin futures on the Chicago Mercantile Exchange. And asset management behemoth Fidelity has announced plans to launch Fidelity Assets Services, which will be providing custody and trading solutions for enterprise clients.

‘Furthermore, a number of projects have launched aimed at addressing key problems in the space, such as scalability, privacy, custody, crypto-asset volatility, interoperability and governance,’ notes the report.

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