4 reasons why Paul Tudor Jones’ 5% Bitcoin exposure advice is difficult for major funds

Gordon James


Buy and Sell Crypto

Bitcoin exposure is difficult when you are a major firm. For example, Berkshire Hathaway’s (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett recently said “I would never invest in a bitcoin derivative. And I wouldn’t put one of my millions of dollars into something I don’t understand.” Due to the cryptocurrency’s volatility, with a tumble of 10% in 2017, major funds are wary of Bitcoin exposure.

Paul Tudor Jones has been an advocate of Bitcoin for several years. He is famous for recommending investors to buy small percentages of Bitcoin regularly, claiming that it is a good way to diversify one’s portfolio. However, after the recent correction, he recommended an exposure of 5% in Bitcoin to most of his clients. While some clients may be able to follow this philosophy, most major funds are not able to invest so much in such an illiquid asset.

Most people are wondering why major fund managers are not investing in Bitcoin. After all, the mainstream media has been touting Bitcoin as “the currency of the future” for months now. Paul Tudor Jones, the founder of Tudor Investment Corporation, and one of the world’s most famous mutual fund managers, also took note of the digital currency’s recent run up. Jones wants his investors to buy Bitcoin for around 5% of their assets, a small price to pay for exposure to Bitcoin’s potential.

In an interview with CNBC on 14. In June, legendary investor Paul Tudor Jones sounded the alarm about rising inflation. After last week’s Consumer Price Index (CPI) report showed that inflation in the US had reached a 13-year high, the founder of Tudor Investment advocated allocating a 5% portfolio to bitcoin (BTC).

Companies that manage investment funds, listed by volume of assets under management, in USD Source: MutualFundDirectory.org.

The world’s 50 largest asset managers collectively manage $78.9 trillion in funds. An investment of just 1% in cryptocurrencies would be worth $789 billion, which is more than bitcoin’s total market capitalization of $723 billion.

However, there is a fundamental misunderstanding of how the industry works and that is what prevents the 1% allocation, let alone the 5%.

Let’s take a look at some of the biggest hurdles the traditional financial sector will have to overcome before becoming a true Bitcoin monkey.

Obstacle 1: Risk assessed

Investing in bitcoin remains a major hurdle for large mutual fund managers, mainly because of the perceived risk. On the eleventh. In June, the US Securities and Exchange Commission (SEC) warned investors about the risks of trading bitcoin futures, citing market volatility, lack of regulation and fraud.

While various stocks and commodities have similar or even higher 90-day volatility for one reason or another, the agency continues to focus on bitcoin.

The volatility of DoorDash (DASH), a $49 billion U.S. listed company, is 96%, compared to 90% for bitcoin. Meanwhile, Palantir Technologies (PLTR), a $44 billion US technology stock, has a volatility of 87%.

Obstacle 2: Indirect impacts are virtually eliminated for US-based companies.

Much of the mutual fund industry, most of which manage billions of dollars in assets, cannot buy physical bitcoins. There is nothing specific to this asset class, but most retirement funds and 401k’s do not allow direct investment in physical gold, art or farmland.

However, these restrictions can be circumvented by using exchange-traded funds (ETFs), exchange-traded notes (ETNs) and exchange-traded mutual funds. Cointelegraph has already discussed the differences and risks of ETFs and trusts, but only superficially, as each fund has its own rules and restrictions.

Obstacle 3: Fund regulation and managers can discourage the purchase of BTC

Although the fund manager has complete control over investment decisions, it must follow the rules of each specific fund and adhere to the risk management measures established by the fund manager. The addition of new tools, such as. B. CME bitcoin futures, may require SEC approval. Renaissance Capital Medallion funds faced this problem in April 2020.

Those who choose bitcoin futures on the CME, such as Tudor Investment, should continue to flip their position before the monthly expiration date. This problem represents both the liquidity risk and the tracking error of the underlying instrument. Futures contracts are not designed for long-term trading, and their prices differ significantly from those of traditional cash trading.

Obstacle 4: Conflicts of interest exist in the traditional banking sector

Banks play an important role in this area. JPMorgan, Merrill Lynch, BNP Paribas, UBS, Goldman Sachs and Citi are among the largest mutual fund managers in the world.

The relationship with other asset managers is close, as the banks are the respective investors and distributors of these independent investment funds. This entanglement goes even further, as the same financial conglomerates dominate the issuance of stocks and bonds, meaning that they ultimately decide how investment funds are allocated in these transactions.

While bitcoin does not yet pose a direct threat to these industry mammoths, misunderstanding and risk aversion, including regulatory uncertainty, are causing most professional fund managers with $100 trillion in capital globally to avoid the stress of entering a new asset class.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Cointelegraph. Every investment and every stage of trading involves risk. You should do your own research before making a decision.A few weeks ago, Paul Tudor Jones had the opportunity to give a presentation in front of a number of major hedge funds that were present for the Blackstone Alternative Investment Symposium (BAIS) in New York City. The presentation was titled “The 5% Bitcoin Exposure: How the Large Funds Will Want to Get Into It.” During the presentation Mr. Jones attempted to make the point that it is impossible for the larger funds to buy more than 5% of the total Bitcoin supply. He then went on to make the point that it is more difficult to buy 5% of the total Bitcoin supply than it would be to buy 5% of the total stock of a large company.. Read more about next bitcoin stock and let us know what you think.

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