Bitcoin Will Break Wall Street's Heart

 Bitcoin Will Break Wall Street's Heart

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A bitcoin mine in Sichuan province.

A bitcoin mine in Sichuan province.

Photo: liu xingzhe/chinafile/Shutterstock

The gyrating price of bitcoin has made headlines again this year, as has growing interest from institutional investors. But most vanilla financiers have more to lose than win by diving into digital assets.

Open interest in
CME’s
bitcoin futures has surged by more than 250% since the beginning of October. Large trade sizes and the fact that bitcoin doesn’t have to be held directly mean CME’s system is considered a benchmark of activity by institutional investors.

Crypto-focused hedge funds and individual buyers are free to invest as they like, of course. Buying a volatile asset without cash flow in a euphoric market is a risk they are willing to take. It has certainly paid off for those with iron stomachs.

The calculation for mainstream institutions should be very different. Many will take a small allocation that will make little difference to their bottom line if prices surge, but they will still be left to explain to clients why they invested in an entirely speculative asset if things go sour. By investing in such small amounts, they are crossing the Rubicon without getting to enter Rome.

Eighty-one percent of investment into the funds run by Grayscale Investments in the third quarter came from institutional investors, according to the company. Grayscale’s flagship Bitcoin Trust had assets under management of $1.9 billion at the start of 2020, $4.7 billion by the end of September and $21.1 billion as of Tuesday.

Grayscale CEO

Michael Sonnenshein
told Bloomberg last week that pension funds were helping to drive the growth. Insurers are getting involved, too. Massachusetts Mutual Life Insurance is one high-profile recent example, having purchased $100 million of bitcoin. The company says it is comfortable with the exposure, which makes up around 0.04% of the $235 billion it recorded in assets at the end of September.

Estimates by Digiconomist suggest that the bitcoin network consumes around as much electricity as Chile, 77.78 trillion watt hours on an annualized basis. Bitcoin mining is often concentrated in places with abundant renewable energy such as China’s Sichuan province and Iceland, but increasingly climate-conscious governments will nonetheless likely take a dim view of bitcoin mining’s social utility as a priority for energy use.

The prospect of more onerous regulation may take the shine off digital assets, too. The Treasury Department’s plan to make trading platforms keep more stringent identity and transaction records is just one example of how the attractive anonymity of the system could be undermined.

Freewheeling individual investors willing to take the risk may still enjoy the ride. But with the regulatory framework for cryptocurrencies still unfurling and the bitcoin rally already long in the tooth, the upside for big institutions looks far less clear.

Write to Mike Bird at Mike.Bird@wsj.com