Institutional investors have long embraced the illiquidity premium, favoring private equity and venture strategies that lock up capital for years.
However, Jeff Park, Active Portfolio Manager at Bitwise Asset Management, believes this mindset fails to capture the unique advantages of bitcoin and other digital assets.
Rethinking traditional approaches
Park challenges the legacy of Yale’s David Swensen, who championed allocating large portions of portfolios to alternative assets with long lock-up periods.
While this worked in traditional finance, Park asserts that bitcoin operates by a different set of rules. He explained:
“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.”
Liquid markets and scalable strategies
During periods of high volatility, Park points out that trading strategies such as market-making and arbitrage can deliver significant returns.
For example, when bitcoin fell 7% in early April 2024, market-making strategies annualized at 70%, while arbitrage produced 40% returns.
Institutions, however, continue to favor venture-style allocations, potentially missing out on the opportunities presented by bitcoin’s liquid markets, which saw over $2.5 trillion in spot and futures volume in May alone.
Volatility as an advantage
Unlike traditional markets, bitcoin’s high volatility is not just a risk but an advantage, unlocking short-term opportunities for institutions.
Park argues that if other major assets had similar volatility, expectations around returns would fundamentally shift.
Bitwise has structured multi-strategy products to capitalize on liquid alpha across arbitrage, market-making, and trend-following.
Looking forward
Park concludes by quoting Swensen’s appreciation for unconventional portfolios, remarking:
“Establishing and maintaining an unconventional investment profile requires accepting uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom…Sounds like crypto to me.”
Institutional investors who recognize and embrace bitcoin’s liquid, volatile nature may be best positioned for future success.
