NEW YORK- Global investors are scooping up stakes in cryptocurrency funds and companies, as they seek exposure to a sector many believe could withstand the fallout from the Russia-Ukraine conflict.
Research firm Fundstrat, in its latest note to clients, said venture capital (VC) buyers invested around $4 billion in the crypto space in the last three weeks of February. VCs poured in another $400 million to start-ups in the sector last week, data showed.
The VC investment is consistent with broad weekly inflows. Since the beginning of the year, weekly investments in the industry have been averaging anywhere between $800 million to about $2 billion, Fundstrat data showed.
New crypto funds also raised nearly $3 billion over the last two weeks as of Friday, the most so far this year.
“The conflict in Ukraine has weaponized our financial and digital economy and really accelerated blockchain adoption,” said Paul Hsu, founder and chief executive officer of Decasonic, a $50-million hybrid fund investing in both digital assets and venture capital. He added that there’s demand of up to $200 million to invest in his fund.
“We are seeing a re-allocation to crypto and blockchain away from real estate and bond funds, for instance, because of higher interest rates. I’ve seen this with my funds but unfortunately, because I’m closed-end, I cannot admit more funds nor investors,” Hsu said.
Refinitiv Lipper data showed that US investors pulled a net $7.8 billion out of bond funds in the week to March 9.
Real estate funds saw net outflows of $707 million in the same period, after posting outflows worth $1.15 billion the previous week.
“Crypto native companies are still raising at very high valuations and many funding rounds are still oversubscribed,” said George Melka, chief executive officer at crypto broker SFOX.
“In fact, crypto startup valuations are probably the highest I’ve seen.”
Bain Capital Ventures, a unit of private equity firm Bain Capital, for instance, announced early last week that it is launching a $560 million fund focused exclusively on crypto-related investment.
Crypto assets have outperformed traditional risk-on assets such as stocks during the crisis.
Bitcoin rose 12.2 percent last month, while ether gained 8.8 percent. Since bottoming on Feb. 24 when Russia invaded Ukraine, the digital currencies have gained 14.5 percent and 13.5 percent, respectively, while the S&P 500 rose just 3.2 percent.
Crypto investment products and funds saw $163 million in new institutional money in the two weeks to March 4, while inflows into blockchain equities totaled about $15.6 million, according to data from asset manager CoinShares.
The inflows of $127 million were the largest seen so far this year. Flows into the crypto sector turned positive in late January, after five straight weeks of outflows, CoinShares data showed.
Crypto fund returns have stabilized.
Meanwhile, wild swings in asset prices following Russia’s invasion of Ukraine are prompting some investors to pare risk in their portfolios, fearing that the type of volatility seen in commodities in recent weeks could hit other markets.
At issue is liquidity — or the ease at which investors can buy or sell an asset without affecting its price. While episodes of low liquidity have contributed to sharp gyrations across markets over the last decade, signs of stress have become more plentiful in the last few weeks, exacerbated by everything from sanctions against Russia to expected central bank tightening. (Full Story)
Should liquidity continue to deteriorate throughout markets, investors worry that other assets could be subject to the kind of violent price swings that have wracked commodities this month – which have included a one-day doubling in nickel prices and a surge in oil to 14-year highs.
“It isn’t always clear where the contagion risks lie,” said Frances Donald, Global Chief Economist at Manulife Investment Management. “This is why liquidity needs to be monitored, not just daily, but hourly at this point, for signs of challenges.”
Financial indicators are showing increasing signs of stress throughout markets.
The so-called FRA-OIS spread, which measures the gap between the US three-month forward rate agreement and the overnight index swap rate was recently at its highest level since May 2020, while another closely-watched short-term funding stress gauge, the spread between the US three-month Libor and the overnight index swap rate was at a similar high. Volatility in stocks, currencies and US Treasury yields has also spiked.
In another potential red flag, Barclays on Monday suspended sales of two products linked to crude oil and market volatility, which some saw as a sign of lack of liquidity.
