Crypto, in this economy? Bitcoin is down approximately 63% in value since this time last year and the industry is on fire after the catastrophic bankruptcy of FTX, which came just six months after the $25 billion collapse of one of DeFi’s most popular projects, Terra.
Now, traditional investors are retreating from crypto and licking their wounds. Major investors in FTX such as asset manager BlackRock, which participated in the exchange’s meme-laden $420.69 million funding round, got sorely burned – as did the Ontario Teacher's Pension Plan fund, which has written off its $95 million investment in FTX. Crypto-friendly hedge funds are limiting their exposure, too. A June 2022 survey (pre-FTX) from PWC on crypto hedge funds found that while hedge funds increased their assets under management by 8% on the year to $4.1 billion, they reduced their exposure to the market. Over half invested less than 1% of their holdings in crypto.
Some institutional investors have given up on crypto altogether. The asset class “will not find a home in institutional asset allocation," Hani Redha, a portfolio manager at London’s Pinebridge Investments, told Bloomberg last month. “There was a period when it was being considered as a potential asset class that every investor should have in their strategic asset allocation and that’s off the table entirely."
After institutional investors backed out, the ProShares Bitcoin ETF, once a popular vehicle with moneyed financial companies, quickly became the sixth-worst-performing exchange-traded fund of all time, according to the Financial Times. Net inflows of $1.8 billion in its first year trickled out after bitcoin’s price crashed, and its holdings stood at just over $500 million as of Nov. 21, 2022.
“We’ve seen funds nosedive right out of the gate in this manner, but rarely do they attract so much in assets so soon after launching like [this] did,” Jeffrey Ptak, chief ratings officer at Morningstar Research Services, told the FT.
With frostier attitudes toward the industry, crypto’s own suite of institutional investors is struggling to stay alive. Lenders including BlockFi, CoinDesk sister company Genesis and SALT have paused withdrawals. Voyager Digital and Celsius Network already went bust over the summer.
Hedge funds that had exposure to FTX are marking down investments to $0 and forgetting about their investments in its exchange token, FTT, altogether.
JPMorgan analysts predict a wave of deleveraging, marked by a “cascade of margin calls,” to follow the collapse of FTX. (Those same analysts, led by Nikolaos Panigirtzoglou, once said that bitcoin could reach $146,000 if it replaced gold as a safe haven asset. Panigirtzoglou now thinks that it could hit as low as $13,000.) Singaporean crypto hedge fund QCP Capital predicted that token prices will fall further, and that crypto markets have diverged from their correlation with traditional markets, having tracked the commodities market since 2017.
Accordingly, CoinShares found that investors are shorting crypto more than ever before, reporting “the largest inflows into short-investments on record.” In August, 51% of available shares in bitcoin-holding MicroStrategy, worth $1.35 billion, were sold short. “This will hurt badly, more so than any other crisis our industry has faced before,” wrote QCP in a market update. “Trust, the most expensive commodity outside of time has been lost, and it will take a lot of time to build back as a whole.”
Explore the Future of Finance at Consensus 2023
Join the Money Reimagined Summit, taking place at the annual Consensus gathering in Austin, Texas this April, to map out the future of finance and investing with a gathering of institutional and retail investors, hedge fund managers, OTC digital asset traders, exchange providers, venture capitalists, smart contract developers, bankers, compliance officers, lawyers, custodians and everyone in between.
Together we’ll address the opportunities and pitfalls that lie in integrating the radical, decentralized finance world of DeFi with traditional “TradFi” finance. We’ll explore the lessons learned from a brutal crypto winter and figure out where crypto solutions fit within the challenging post-pandemic global macro environment.