Institutional investors should consider an allocation to cryptocurrencies following recent collapses in the prices of various digital ‘coins’, according to Cambridge Associates.

The investment consultancy group said investments in blockchain technology – which backs cryptocurrencies such as Bitcoin – could also be worth allocating to following price falls.

According to cryptocurrency trading website eToro, the price of Bitcoin fell by 43.6% in the 12 months to 26 March, while other popular currencies declined by even more: Litecoin lost 46.6% and Ethereum was down 64.3% in the same timeframe.

Marcos Veremis, managing director at Cambridge Associates, argued that the price falls made for an attractive entry point for the emerging asset class.

“Investing in cryptoassets remains controversial, and we are extremely selective and cautious in this space,” he said. “However, the attitude of many institutional investors in this space is not dissimilar to that of venture capital investors in early internet companies in the 1990s. Early-stage venture investing implies that the vast majority of companies and projects in this space could, and probably will, fail.

“Institutions know they are investing in cryptoassets on the basis that they may see many of their portfolio companies produce no returns, but with outsized returns from one or two of them.

“Though cryptoasset investments entail a high degree of risk, some may upend the digital world. Venture-style due diligence and technical expertise may provide a better understanding of cryptoasset investments and their long-term return potential.”

Cambridge emphasised that investors in cryptocurrencies would have to “spend a considerable amount of time learning about the space” before allocating.

The company added that its research suggested a maximum allocation within a portfolio of 1%. Investors already in the cryptoassets space held an average 0.2-0.3%, Cambridge said.

In 2017, French asset manager TOBAM launched the first European open-ended Bitcoin fund for institutional investors. 

At the time, Yves Choueifaty, president of TOBAM, described Bitcoin as a “highly diversifying asset”, and said the company had conducted research into the digital currency “from a technical, financial, economic and regulatory point of view” for a year prior to the launch of the fund.

Since its launch to 22 March, the fund is down 50.5%, according to data from Bloomberg.

Further reading

Getting to grips with cryptocurrencies
For institutional investors and asset managers, cryptocurrencies pose a triple dilemma

Investment in Cryptocurrency: Disruption or disappointment?
Understanding the architecture supporting digital currencies like Bitcoin is increasingly important