150 endowments conducted a survey in Q4 2018 by news publications Global Custodian and The TRADE Crypto in partnership with BitGo, 94% said they had invested in crypto-related initiatives in the past 12 months. Though crypto market displays extreme volatile traits, there are investors and organizations who want to see it as a relatively stable market.
How Endowment Funds Work
To understand how endowment funds work, let’s have a look at a scenario: Assume that a university has got some wealthy alumni, willing to contribute to university’s endowment. All their donations make up the principal investment of the endowment. Let’s say that the principal investment raised was $500,000 and the manager generated $25,000 on top of it with his investment strategy. Now, the organization can put $25,000 to use for its expenses while the manager continues investing the principal to generate more returns.
Endowment funds are important for organizations as they heavily rely on them. This is why they mostly seek safe and stable investment opportunities. And this is where cryptos have earned a name for themselves as they were the first choice of many endowment funds. The survey showed that out of 150 endowments, 141 had directly or indirectly invested in crypto-assets and funds. Moreover, it was revealed that only 7% of respondent weren’t optimistic about the future of their allocations as they anticipated a decrease within the next 12 months.
Who Uses Endowment Funds
Endowment funds are investment funds utilized by foundations and organizations such as universities, nonprofit organizations, hospitals and churches. Organizations opt for these kinds of funds to save principal investment and use the returns on it to cover their operating and other expenses. These organizations usually hire a manager to ensure the growth of principal investment and returns on it.
Once the principal investment for the endowment fund is raised, it is invested according to the investment policy by the manager of that endowment fund. Investment policy defines what kind of investments can be sought by the manager and how aggressive he can be while investing. Moreover, the withdrawal policy is also devised along with investment policy to set an amount that can be withdrawn from the fund by the organization. The time period after which funds will be withdrawn is also finalized in the withdrawal policy. Usually, the balance remaining in the fund and need of the organization impact the withdrawal policy.
Regulation, Capital Flow and Liquidity
Most importantly, the respondents were the people who were the decision makers within their endowment. Majority of them were based in the U.S. while remaining were either from the U.K. or Canada. These respondents were also inquired about their concerns with crypto endowment funds. The most frequent ones registered by them included lack of robust market infrastructure, volatility, regulatory concerns and lack of liquidity.
As cryptocurrency and blockchain are quite new, their market and financial infrastructure aren’t that developed. This is also why governments across the globe have not been able to draw or finalize regulations regarding cryptos. Respondents also highlighted some characteristics that they thought should be displayed by crypto-asset funds. Among them, the top three were robust regulation, sufficient capital flow and liquidity.
Flaws in Cryptos
With time, more people are expected to enter the market and governments are expected to better understand cryptocurrencies and blockchain projects. This means that flaws outlined by respondents will be done away with, improving the overall health of cryptos as an investment asset.
However, the volatility of the cryptocurrency market remains an issue for crypto enthusiasts. Prices of cryptos see a drastic drop or rise.On 1st April, the price of bitcoin revolved around $4,151 and on the very next day, on 2 April, it reached $4,906. Similarly, while exhibiting the same volatility, bitcoin dropped its value from $5,615 on 18 November 2018 to $4,418 on 20 November 2018.
Cryptos and Hedge Funds
Apart from endowment funds, hedge funds also place bets on cryptocurrencies. Like their counterpart, hedge funds have investors and managers but the primary motivation behind hedge funds is to make a profit. These hedge fund managers often long their stocks, holding stocks while expecting their price to rise in future, or short their stock, selling stocks while expecting their price to drop in near future, according to market trends. At the moment, there are more than 700 crypto investment funds.
The dynamics of the crypto market have changed substantially. Financial institutions that bitterly opposed cryptocurrencies earlier are now not only supporting it but also adopting it. Recently, a Japanese bank, Mizuho, announced launching a cryptocurrency, J Coin. Moreover, against the odds, the International Monetary Fund (IMF) and World Bank have stepped into the world of blockchain and cryptocurrency by launching a private blockchain and quasi-cryptocurrency, called Learning Coin.
Apart from the crypto enthusiasts, many of the those who once stood against cryptocurrencies and blockchain are also advocating and adopting cryptocurrency and its underlying technology, blockchain. While they are exploring and utilizing the offerings of cryptocurrency and blockchain, the mass adoption of these technological innovations appears to be more promising than ever before.