Bitcoin finds room in small funds; large institutions still on sidelines

NEW YORK, March 18 Digital currency bitcoin has
found favor among smaller investors, thanks to the availability
of funds designed to invest in it, but remains a niche among the
larger investing community.

Investors at some family offices, smaller mutual funds, and
traders at hedge funds say bitcoin has helped returns and
demonstrated a low correlation with other asset classes.

Hopes that bitcoin would become a broadly used alternative
to other currencies helped buoy its price to more than $1,000 in
December 2013, when its market capitalization was $13 billion.

But the market cap has retreated since then, to about $6.4
billion as of Thursday.

Early enthusiasts for the crypto-currency were drawn to its
revolutionary ideals of transparency and a lack of central or
official control. The risks of dealing in bitcoin were laid bare
in 2013 when Tokyo-based exchange Mt Gox collapsed after
admitting it had lost the equivalent of hundreds of millions of
dollars of investor funds.

The currency’s earlier ties to gambling and criminal
websites did not endear it to traditional investors.

Jeremy Millar, founder and managing partner at Ledger
Partners in London, estimated that 50 to 90 percent of bitcoin’s
current $6.4 billion market cap is held by near-institutional
money such as individuals at hedge funds and family offices.
That has not changed over the last two years.

He does not have an estimate for institutional investment
holdings of bitcoin. But he said they are likely to be
insignificant, compared with the smaller investors who have
fewer restrictions about fund allocation.

“What is clear though is that over the last two years,
bitcoin has emerged from its ‘hacktivist’ origins to a more
institutionalized ecosystem which includes the participation of
hedge funds, traders, and professional investors,” said Millar.


Funds dedicated to investing in bitcoin are relatively
small. The largest is the Pantera Bitcoin Fund, a $160 million
hedge fund founded by Dan Morehead, formerly of Tiger
Management, available to institutions and individuals who invest
$50,000 or more.

According to a Pantera Bitcoin Fund brochure, the fund was
launched in July 2013, a period when bitcoin traded
at around $65. On Thursday, it traded at $418.80, a gain of more
than 500 percent from July 2013. The firm did not comment on
fund performance or its investors.

The majority of the Pantera Fund’s investors are family
offices and high net worth individuals, said two people familiar
with the fund.

The Grayscale Bitcoin Investment Trust, with assets of more
than $60 million, is another vehicle for investors. GBTC is
backed by bitcoin advocate Barry Silbert and his Digital
Currency Group.

It is the only publicly traded U.S. security in the
over-the-counter market invested in bitcoin. Volume is thin,
with a few thousand shares traded daily, according to Thomson
Reuters data.

Antonis Polemitis, managing director at Ledra Capital in New
York, a family office specializing in education and technology,
said that on average, clients have allocated 1 to 3 percent of
their portfolios to bitcoin.

“A lot of people will take that bet with 1 percent of their
assets,” he said. “A 1 percent loss does not change anyone’s
life in any way. If it goes up 10 times, then you get to feel
very smart.”

Some investment managers say having bitcoin in portfolios
has helped performance.

ARK Invest, which manages four exchange-traded funds with
$240 million in assets, holds GBTC in its $12 million Next
Generation Internet ETF and the $7 million ARK Innovation ETF.

Chris Burniske, analyst and blockchain products lead at ARK
Invest in New York, said since investing in September 2015, GBTC
has contributed 67 basis points to the Next Generation Internet
ETF’s return and 62 basis points to the ARK Innovation ETF.

For 2015, the Next Generation ETF posted a 15.29 percent
return, while the Innovation ETF had 3.76 percent gains.

For Kingsbridge Wealth Management, a multifamily office in
Las Vegas with $150 million in assets, GBTC has become a great
diversifier because so far it has had a low correlation with
other asset classes, said David Dunn, the firm’s founder and
chief investment officer. The firm has about $1.7 million
invested in bitcoin and its underlying technology, the
blockchain, Dunn said.

(Editing by David Gaffen and Matthew Lewis)