Heavyweight fund groups including Abrdn and Aviva Investors said other big name investors that have steered clear of cryptocurrencies will be extra cautious of entering the market following FTX’s collapse.
Asset managers have previously voiced concern over cryptocurrencies such as bitcoin, claiming a lack of regulatory oversight, extreme volatility and uncertain diversification benefits make them a questionable fit for portfolios.
Now with the collapse of crypto exchange FTX, which filed for bankruptcy in the US on 11 November, institutional investors watching developments unfold from the sidelines are likely to think twice before entering the market.
“In terms of broad adoption, it is fair to say that this is a major setback, greatly increasing the hurdle for institutional participation in the space,” said Max Macmillan, an investment director in Abrdn’s multi-asset team.
“Cryptocurrencies had already revealed themselves to resemble the pointy edge of tech equities, selling off with the withdrawal of liquidity and casting significant doubt over their inflation protecting or systemically diversifying virtues.”
While most mainstream asset managers have been wary of investing directly in cryptocurrencies, some have started to increase their exposure to digital assets following demand from clients.
In August Abrdn acquired a stake in Archax — the UK’s first regulated digital securities exchange, which gives institutional investors access to blockchain-based digital assets.
Archax is the first and only digital securities exchange that has won approval from the Financial Conduct Authority, with permissions covering trading, custody and brokerage.
However the collapse of FTX, Macmillan said, shows the crypto ecosystem is “no less exposed to the travails of human frailty, in a way that can be unhinged and go unchecked”.
“The lack of a lender of last resort in the space is also pointing out the risk of a system where liquidity shortages can be fatal,” he said.
Several mainstream asset managers have been caught out the collapse of FTX, which was founded by Sam Bankman-Fried, a 30-year-old who at one stage was considered one of the world’s richest men.
BlackRock and VanEck were hit having backed FTX, while Sequoia said it was writing down its $150m investment in the exchange to virtually zero.
Major digital assets firms like CoinShares, Galaxy Digital and Genesis all had significant exposure to FTX, while BlockFi, which FTX bailed out to the tune of $250m in June, is planning to lay off workers and is exploring a bankruptcy filing, according to The Wall Street Journal.
“Many institutional investors will be put off by what they have seen, and many who were previously on the fence will look away from the crypto markets, for now,” said Marcus Sotiriou, an analyst at digital assets broker GlobalBlock.
Longstanding crypto critics have said the collapse of FTX needs to prompt regulatory intervention.
”The FTX debacle only reinforces the call for regulation and oversight at various levels, otherwise trust in the crypto space will be badly damaged, if not lost,” said Vincent Mortier, chief investment officer at Amundi, Europe’s largest asset manager, which does not invest in cryptocurrencies.
Guillaume Paillat, a portfolio manager within the multi-asset team at Aviva Investors, said FTX’s collapse shows a problem not with cryptocurrencies, but with exchanges which are “lightly regulated”.
“In a way, the FTX debacle is a trigger to increase the regulatory push and bring more safety for investors,” said Paillat.
Even if more regulation is introduced following the demise of FTX, Paillat said it will still be hard to win over some sceptical big name investors that have been watching from the sidelines.
“Increased regulation will eventually remove a hurdle for institutional investors, but other issues remain: how to value; energy consumption; and volatility dampening diversification benefits,” he said.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, added: “It is likely that institutional investors who were toying with dipping their toe in the market, will stay highly hesitant and will stay on the side lines until the rules of the game have been thrashed out by regulators around the world.
“But this will take time, as financial oversight bodies also don’t want to add too much legitimacy to the crypto world by inching it into the regulatory sphere, without ensuring that ordinary investors will be shielded from the huge risks which will remain.’’
Even crypto champions argue the downfall of FTX should lead to better oversight of the market.
“It feels very similar to the dotcom boom and collapse, and then the unicorns which came out the other side. Valuations were all over the place,” said Hector McNeil, co-CEO of HanETF, a platform that helps asset managers launch exchange-traded funds, which in August announced it was broadening its offering to the crypto space.
“More regulation is needed. It’s insane to me that these companies can call themselves exchanges, which suggests stability and oversight.”
To contact the author of this story with feedback or news, email David Ricketts