Jeff Dorman, a CoinDesk columnist, is chief investment officer at Arca where he leads the investment committee and is responsible for portfolio sizing and risk management. He has more than 17 years of trading and asset management experience at firms including Merrill Lynch and Citadel Securities.
Carl Icahn is famous for moving in and out of asset classes. This is quite different than how most asset managers and professional investors invest, who are generally locked into an asset class based on specific mandate, and are therefore forced to try to make something out of whatever is available to them, even if the opportunity set isn’t great. While some may label Icahn an activist investor, or a vulture investor, he’s actually more appropriately labeled as an “opportunist,” which is to say he isn’t just an equity guy or a bond guy or a real estate guy. Icahn has famously said, "My investment philosophy, generally, is to buy something when no one wants it."
The crypto markets to date have been dominated by crypto-native investors. There is very little cross-asset ownership largely because the infrastructure is totally different. Crypto investing doesn’t fit with traditional investor mandates, nor does it fit within the work flows of traditional banks, prime brokerages, exchanges or algorithms. This is slowly changing with the entry of traditional financial powerhouses to the digital assets space like Fidelity, CME and NYSE, but this asset class is still largely foreign and unappealing to the majority of investors.
That said, a lack of full attention has its advantages. When one isn’t focused day to day on the equity markets, it is often easier to see one or two data points, interpret the data and make clear and objective decisions. For example, 2019 earnings were incredibly weak, and the majority of stock gains were via multiple expansion and central bank balance sheet growth. As a non-equity investor, this seems like a better time to sell than buy.
Similarly, if you’re not focused every day on digital assets and were presented with just the facts right now regarding supply and demand, adoption and monetary policy, you might conclude the current macro environment is creating the perfect storm for owning certain digital assets. We see this dynamic play out all the time in traditional markets. In 2008, many value investors moved away from equities and into corporate bonds, and distressed debt investors largely moved into bank debt and mortgages. In 2012, many U.S. bond investors moved into European bank loans. And from 2015 to present, just about everyone has rotated into equities.
Similarly, crypto needs investors to come and go who aren't solely crypto investors. This asset rotation and opportunistic investing will help the market find equilibrium at both market tops and bottoms, helping to reduce the crazy highs and the depressing lows historically associated with this asset class.
Easier said than done of course, but we are beginning to see this happen in real time. Those not in the market full time are starting to cherry-pick just like Carl Icahn. Ark Invest, which famously became the first public fund to invest in bitcoin (BTC), seems to be fund doing just that. A quick look at its latest 13-F filings show the firm has historically bought bitcoin on price dips (throughout 2018), sold at market peaks (June 2019) and has recently added back at market lows (December 2019).
Right now, crypto continues to largely be an isolated, and oft-ignored, section of the financial ecosystem. Perhaps the bitcoin carry trade (similar to the yen carry trade in 2013) will be one catalyst that brings new players into crypto, or maybe a declining bond and equity market will lead to asset rotations.
Regardless of how it happens, this will be the next step before digital assets can truly take off and become mainstream.