Bitwise: Institutions Misjudge Crypto's Liquidity Advantage
Bitwise Highlights Crypto's Overlooked Liquidity Advantage
Institutional investors are traditionally drawn to the illiquidity premium, assuming that locking capital in private equity, credit, or venture capital yields superior returns. However, Bitwise Asset Management suggests this approach is flawed when applied to crypto assets.
Jeff Park, Active Portfolio Manager at Bitwise, argues that institutions are missing out on the unique benefits of liquid alpha in the digital asset space. He believes crypto's volatility and liquidity create opportunities for superior returns without the long lock-up periods associated with traditional investments.
Rethinking the Crypto Playbook
Park's analysis draws inspiration from David Swensen, the late Yale Endowment CIO known for his advocacy of alternative investments. While Swensen's model emphasized patient, illiquid strategies, Park contends that crypto operates under different principles.
“In crypto, I believe the term structure is in backwardation, where investors are overcompensated to invest at the near end of the curve versus the long end. You are paid handsomely to take liquid risks where the scorecard is generated every day without having to wait ten years,” Park explained.
He points to the performance of trading strategies during volatile periods as evidence. For example, during a 7% Bitcoin dip in early April 2024, market-making strategies reportedly annualized at 70%, and arbitrage strategies delivered 40% returns.
The Scalability of Liquid Crypto Markets
Despite these opportunities, institutions continue to allocate significantly to crypto venture capital, mirroring their traditional investment strategies. Bitwise argues that this overlooks the scalability and efficiency of liquid crypto markets. Spot assets traded over $2.5 trillion, alongside another $2.5 trillion in Bitcoin futures in May alone.
“The liquid crypto market is undoubtedly more scalable for institutions versus the venture market, which by definition must be capacity constrained for alpha generation,” he argued.
Park frames crypto's volatility as an advantage, suggesting that the potential for short-term gains outweighs the perceived risks. He posits that if the S&P 500 had volatility near 70%, private equity expectations would be drastically different.
Bitwise has positioned its multi-strategy products to capitalize on liquid alpha opportunities across arbitrage, market-making, and trend-following, suggesting a shift towards embracing the unique characteristics of the crypto market.