Why Rush Your First Crypto Investment

Institutional clients traded $1.14 trillion worth of cryptocurrencies on Coinbase in 2021, more than twice the $535 billion of retail investors, according to the Wall Street Journal. There are about 856 crypto hedge funds operating today, with $68 billion in assets under management. The AUM is about the same total assets under management as the $50 billion in the entire hedge fund industry in 1995—which has since grown to $4 trillion of assets.

16 percent of Americans have invested in, traded, or used cryptocurrencies, reports the White House in a recent study. There is little doubt that crypto is here to stay in some format. But there seems little reason to rush into crypto investing.

Many of the early reasons for investing in crypto have proven false from a portfolio investment viewpoint. One argument for investing in crypto was for portfolio diversification. Yet year-to-date, Bitcoin BTC (XT XTD) is down 15 percent, more than double the S&P 500 down 7 percent. So crypto is not proving much of a portfolio diversifier, even if investing in an amount to have a material impact—and those institutions that invest are typically looking at allocations only in the 2-3 percent range. A second argument for investing in crypto was for an inflation hedge. Yet crypto certainly doesn’t seem to perform as an inflation hedge either, while gold—the old-fashioned inflation hedge—is up 8 percent year-to-date.

However, it is undeniable that while investment in crypto is starting out slow, momentum is building. And much institutional investment is focused on crypto infrastructure, rather than actual cryptocurrency.

Last month, Biden signed an executive order calling on the government to study cryptocurrencies. Biden specifically called for the exploration of a government-backed digital currency that the US central bank would operate, known as a “fiat currency”. He also asked regulators to move to identify and mitigate risks digital assets may pose to the financial system.

Cryptocurrency advocates applauded the Biden order for the legitimacy it gives crypto, though skeptics remain wary of regulation. SEC Chair Gary Gensler has repeatedly said that cryptocurrencies should be regulated as securities, similar to stocks and bonds.

And earlier this month, Blackrock announced it is looking to offer crypto services as client demand rises—in a letter to shareholders, Fink said the Russia-Ukraine conflict will push countries to reassess currency dependencies, with crypto providing one potential solution.