Institutional investors have historically been conditioned to pursue the illiquidity premium, convinced that committing capital to private equity, credit, or venture capital will yield superior returns.
However, as per Jeff Park, Active Portfolio Manager at Bitwise Asset Management and Chief Investment Officer at ProCap BTC, this paradigm does not adapt well to the cryptocurrency landscape.
Bitwise Suggests Institutions Reevaluate Their Crypto Strategies
Instead, Park champions the concept of liquid alpha, asserting that this quality distinguishes digital assets, and institutions are missing significant opportunities.
Park articulated these insights in a post, referencing the legacy of David Swensen, the esteemed Chief Investment Officer of the Yale Endowment. Swensen is celebrated for popularizing the endowment model, which allocates up to 70% of capital to alternatives.
Swensen’s philosophy reinforced the notion that patient, illiquid investments possess a return premium that justifies prolonged lockup periods. Conversely, Park argues that cryptocurrencies function under a distinct set of principles.
“In the realm of crypto, I contend that the term structure is in backwardation, with investors being overcompensated for investing at the near end of the curve compared to the long end. You receive substantial rewards for assuming liquid risks where the performance evaluations occur daily, eliminating the need for a ten-year wait,” Park elaborated.
He highlighted the efficacy of trading strategies during periods of high volatility. For example, while Bitcoin experienced a 7% decline in early April 2024, Park noted that market-making strategies achieved annualized returns of 70%, with arbitrage yielding 40% returns.
In his perspective, such opportunities challenge the core tenets of illiquidity-based portfolio theory.
However, institutions persist in allocating significant resources to crypto venture capital (VC), mirroring patterns observed in their traditional investment playbooks.
For the Bitwise executive, this oversight neglects the scalability and efficiency of liquid cryptocurrency markets, which exchanged over $2.5 trillion in spot assets, along with $2.5 trillion in Bitcoin futures in May.
“The liquid cryptocurrency market is undeniably more scalable for institutions than the venture market, which inherently must be capacity constrained for alpha generation,” he articulated.
Park even framed cryptocurrency’s volatility as an asset rather than a liability. He pointed out that if the S&P 500 exhibited realized volatility near 70%, expectations for private equity returns would appear drastically different.
In the cryptocurrency space, this volatility unveils short-term opportunities that substantial institutions could leverage without the necessity of a decade-long wait.
Bitwise itself has developed multi-strategy products centered on this thesis, aiming to harness liquid alpha through arbitrage, market-making, and trend-following strategies.
Park proposed that Swensen, who valued nontraditional approaches, might have appreciated the implementation of such strategies within the realm of cryptocurrency.
“Establishing and sustaining a nontraditional investment profile necessitates embracing uncomfortably idiosyncratic portfolios, which often seem outright imprudent to conventional wisdom…Sounds like crypto to me,” Park remarked, quoting Swensen.
Ultimately, Park posits that the next revolutionary figure in institutional investing will be one who recognizes that cryptocurrency’s advantage does not lie in replicating traditional venture or private equity models, but rather in embracing and leveraging its liquidity and volatility.
