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The recent volatility in bitcoin prices triggered by Tesla’s Elon Musk has raised new doubts among institutional fund managers about the future of cryptocurrencies as an asset class.
UBS Wealth Management, Pimco, T Rowe Price and Glenmede Investment Management were one of the companies that have expressed reservations in recent days about the potential of cryptocurrency investments.
The upheaval came after Tesla said it would no longer accept bitcoin payments for its electric vehicles due to environmental concerns, and Musk jokingly referred to dogecoin, a rival cryptocurrency, as “press”During an appearance at the Saturday night live television show.
“Our customer stance is the 10-foot rule: stay away,” said Jason Pride, Glenmede’s director of private wealth investment. “I don’t think the Fed and other regulators are fans of the current market structure of cryptocurrencies.”
Rob Sharps, President and Chief Investment Officer of T Rowe Price, told the Financial Times: “Crypto has an impact on all capital markets and we are experts in capital markets. Ultimately, the mandates we manage for customers are not suitable for investing in cryptocurrencies and we recognize the high level of speculation in this space.
Highlighting extreme volatility, Bitcoin traded at just over $ 44,000 on Monday, down about $ 20,000 from a record high just a month ago. The latest riot was sparked by Musk, who appears to imply on Twitter that Tesla owns or will sell the stake it has accumulated in bitcoin. He later clarified that the carmaker “has not sold any bitcoin.”
Of course, Bitcoin has gained ground with investors in recent years and futures trading has become more liquid. U.S. regulators are also considering whether to approve traded funds in cryptocurrency exchange.
But asset managers say they are concerned about the signs that cryptocurrencies are not meeting expectations that they will become less volatile over time or that they will offer investors hedges against equity turbulence or inflation.
“The volatility of cryptography is stratospherically high and we often see that when stocks are sold, so does Bitcoin and that means it’s not a good portfolio diversifier,” Pride said.
Nicholas Johnson, Pimco’s commodity portfolio manager, had problems with Bitcoin proponents praising it as an inflation haven after cryptocurrencies rose as gold fell in price.
“It’s curious this idea that crypto is an asset of inflation,” he said. “Inflation assets performed lower in recent years, while cryptocurrencies performed very well. “People are looking for a reason to increase cryptography.”
Cryptocurrency anxieties worsened this week when a leading US regulator warned investors that buying mutual funds with exposure to bitcoin futures “is a highly speculative investment” – and warned investment funds that it would submit their participation in the cryptocurrency in an intense examination.
The Investment Management Division at Securities and Exchange Commission said: “Investment in the bitcoin futures market should only be pursued through mutual funds with the appropriate strategies to support this type of investment and the full disclosure of material risks.”
“We expect stricter political and regulatory controls for cryptography as it becomes more commonplace,” said UBS Wealth Management, which added that the price volatility that followed the Tesla announcement “puts manifest the risks that companies face if they assume the exposure to the cryptographic balance sheet “.
Tom Jessop, head of digital assets at Fidelity, which has been more receptive to cryptocurrencies, warned, however, that these investments were still in the early stages of development.
“We refer to bitcoin as an aspirational value reserve and it is a teenager in terms of its development due to extreme volatility,” he said. “Some investors are willing to accept volatility as they see bitcoin as a long-term risk opportunity.”
Fidelity offers an intermediation service that allows more than 100 institutional investors, such as hedge funds and family offices, to buy cryptocurrencies and offer them custody services. Fidelity has a small fund that invests in digital assets for clients and has filed with the SEC to launch an ETF for bitcoin.
Even if asset managers shy away from cryptography, variations in their valuations are a concern for the industry due to the growing power of retailers to cause volatility in the equity market, known as the “effect of replacement ”.
“Seeing what retail investors do is as important as bond flows to managers,” said Viraj Patel, an analyst at Vanda Research. “They’re wondering if millennial capital buys bitcoins, does that mean they’ll stop buying high-beta U.S. stocks?”
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