Sovereign wealth funds (SWFs) are government-owned investment vehicles that manage a country’s wealth, often generated from oil and gas revenues or foreign exchange reserves. Globally, these funds hold a total of over $10 trillion in assets and can significantly impact world markets.
SWFs traditionally invest in various assets, including stocks, bonds, real estate, and precious metals. However, the volatile yet potentially lucrative nature of cryptocurrencies has caught the attention of these funds, as well as some pioneering pension funds in recent times.
According to BlackRock, the world’s largest asset manager, there is a growing interest from SWFs in cryptocurrency investments, particularly Bitcoin ETFs (Exchange-Traded Funds). Robert Mitchnick, BlackRock’s Head of Digital Assets, noted that SWFs are preparing to enter the cryptocurrency market.
This move is significant, considering the cautious approach SWFs typically take due to their responsibility to manage national wealth.
Indeed, while SWFs have been cautious in their approach to cryptocurrency, there are signs of increasing interest.
Most recently, BlackRock has reported a surge in interest from SWFs in their Bitcoin ETFs, particularly after the launch of their iShares IBIT ETF.
Equally, in 2018, Vertex Ventures, part of Temasek Holdings, put money into Binance, a leading cryptocurrency exchange platform. In that same year, GIC, another fund from Singapore, was part of a group that helped Coinbase, a prominent US crypto company, raise $300 million.
Fast forward to April 2021, 3iQ Corporation, which had listed the Bitcoin Fund ETF on the Toronto Stock Exchange, planned to start trading this fund in Dubai in the second quarter of 2021. This was after they got the green light from the Dubai Financial Services Authority.
The same year, Mubadala Investment Company, one of the UAE’s sovereign wealth funds, expressed interest in investing in the crypto ecosystem, indicating a broader acceptance of digital assets.
It’s also worth noting that since October 2020, New Zealand’s KiwiSaver Pension Fund is believed to have kept a 5% position in Bitcoin.
According to some sources, some SWFs are also indirectly investing in digital assets through companies like MicroStrategy and Coinbase, which are heavily invested in cryptocurrencies. For instance, Norway’s Government Pension Fund Global, also known as the Oil Fund and often referred to as the world’s largest sovereign wealth fund, holds Bitcoin indirectly through its investment in MicroStrategy. It has a 1.51% stake in MicroStrategy, which indirectly exposes the Oil Fund to approximately 577.58 Bitcoin, currently worth around $6 million. Moreover, Qatar’s Sovereign Wealth Fund is reportedly considering a significant investment in Bitcoin.
These examples illustrate the increasing engagement of SWFs with cryptocurrency and indicate a growing willingness to explore the potential of digital assets.
What’s Driving SWF Interest in Crypto?
Several factors are nudging SWFs toward cryptocurrencies.
For one, SWFs seek to diversify their portfolios, and cryptocurrency offers a unique opportunity to do so, unlike anything else in traditional markets. Cryptocurrencies like Bitcoin have in the past also shown remarkable growth potential, tempting for SWFs chasing profit.
At a time of rising prices, SWFs may be concerned about inflation eating into the value of their assets. They may view cryptocurrencies, particularly Bitcoin, as a potential hedge against the devaluation of fiat currencies. More widely, as crypto grows more mainstream, it’s harder for SWFs to ignore the sector entirely. For example, the current low-interest-rate environment and subdued inflationary pressures make cryptocurrencies attractive for SWFs looking for yield.
Challenges Slowing Things Down
Despite the growing interest, it’s not all smooth sailing for SWFs and crypto. Several obstacles remain. Perhaps most importantly, analyst point out that regulatory uncertainty remains a significant barrier for SWFs looking to invest in Bitcoin and other cryptocurrencies. Unclear laws make SWFs, which are heavily tied to governments, more tricky.
Cryptocurrencies are also known for their volatility. Prices can swing wildly — which can be good for profits but terrifying for risk management. Furthermore, if a SWF loses money on a risky bet like crypto, citizens might not be happy. Therefore, SWFs are cautious about the reputational risks associated with the nascent and sometimes controversial cryptocurrency market. Indeed, in an ESG-conscious age, there is also the problem that some cryptocurrencies use vast amounts of energy, which may conflict with a SWF’s sustainability commitments.
There is also the fact that crypto represents new territory. Many SWF managers simply don’t fully understand it. Thus, the steep learning curve of understanding and managing cryptocurrency investments can deter SWFs.
Future Outlook
As the cryptocurrency market grows, even with the hurdles, we can expect to see more SWFs exploring investment opportunities.
Despite a recent cooldown in inflows into spot Bitcoin ETFs, BlackRock remains optimistic about the long-term institutional demand. The approval of Bitcoin exchange-traded funds (ETFs) in January could attract more SWFs, as they offer a regulated and familiar investment structure. BlackRock’s Mitchnick believes that the current lull will be followed by a new wave of investment from SWFs and other institutional players.
After all, BlackRock has been playing an educational role, helping SWFs understand the intricacies of cryptocurrency investments. The firm has been involved in ongoing diligence and research conversations with various financial institutions, including SWFs, pension funds, and endowments.
As SWFs learn more about cryptocurrency, they will become more comfortable investing in this asset class.
It’s clear that while SWF’s interest in crypto is growing, their move into the space is still in its early stages, with education and research being key drivers. As the landscape evolves, it will be interesting to monitor how SWFs integrate digital assets into their diverse investment strategies.
Author: Ayanfe Fakunle
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organisations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
