Embracing the Future or Buying into the Bubble: Do Sophisticated Institutions Invest in Crypto Assets?

Abstract

We document that early institutional investors in cryptocurrencies―a new, ambiguous, and risky asset class―demonstrate a willingness to innovate and adapt to change in financial markets. These investments represent a costly signal from institutional managers to investors because the risks of being wrong have both reputational costs and potential career implications. We examine the performance of institutions willing to make crypto investments relative to the performance of their peers who do not. The results show that institutional crypto investors outperform their peers by about 2.8% per year, while followers who first invest in crypto assets in the second half of the sample underperform those without crypto investments. Further, propensity score matching analysis shows early institutional investors in crypto assets outperform those without crypto asset holdings in both subperiods.

Keywords: Institutional investor; Cryptocurrency; Portfolio performance; Trading skill

JEL Classification: G11; G23