Institutional investors have long been accustomed to pursuing profits from illiquidity, believing that locking capital in private equity, credit, or venture investments will yield superior returns.
However, according to Jeff Park, Active Portfolio Management Director at Bitwise Asset Management and CIO at ProCap BTC, this framework does not suit cryptocurrencies.
Bitwise Believes Institutions Need to Rethink Their Cryptocurrency Strategy
Instead, Park advocates for profits from liquidation, arguing that this makes digital assets unique and organizations are missing opportunities.
Park made these comments in an article, drawing on the legacy of David Swensen, the legendary CIO of Yale Endowment. Swensen was famous for popularizing the fund investment model, allocating up to 70% of capital to alternative investments.
Swensen's philosophy reinforced the belief that patient, illiquid investments yield higher returns, worthy of long capital lock-up periods. However, Park believes cryptocurrencies operate under a different set of rules.
"In cryptocurrencies, I believe the term structure is in backwardation, where investors are overpaid to invest in the short-term end of the curve compared to the long-term end. You are handsomely paid to accept liquidation risk, where scores are created daily without waiting ten years," Park explained.
He points out the performance of trading strategies during volatile periods. For example, while Bitcoin dropped 7% in early 04/2024, Park notes that market-making strategies achieved 70% annual returns, with arbitrage trading generating 40% profits.
In his view, these opportunities challenge the foundation of portfolio theory based on illiquidity.
However, institutions continue to strongly allocate to cryptocurrency venture capital (VC), repeating their traditional strategic models.
For Bitwise's executive, this overlooks the scalability and efficiency of liquid cryptocurrency markets, which have traded over $2.5 trillion in spot assets, along with $2.5 trillion in Bitcoin futures contracts in May.
"The liquid cryptocurrency market is certainly more scalable for institutions compared to the venture capital market, which by definition must be limited in its ability to generate alpha profits," he argued.
Park even views cryptocurrency volatility as an advantage, not a risk. He says if the S&P 500 had actual volatility near 70%, return expectations from private equity would be entirely different.
In cryptocurrencies, this volatility opens short-term opportunities that large institutions can leverage without waiting a decade.
Bitwise itself has positioned multi-strategy products around this argument, seeking to capture liquidation profits through arbitrage trading, market-making, and trend tracking.
Park suggests that Swensen, who valued unconventional approaches, might have appreciated such strategies if applied to cryptocurrencies.
"Establishing and maintaining an unconventional investment profile requires accepting investment portfolios that are not comfortable, often appearing completely irrational in the eyes of common intelligence... That sounds like cryptocurrencies to me," Park stated, quoting Swensen.
Ultimately, Park believes the next pioneer in institutional investment will be someone who realizes that the advantage of cryptocurrencies lies not in mimicking traditional venture or private equity investment models, but in accepting and applying its liquidity and volatility.
