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

Abstract

We document that institutional investors increasingly invest in assets that do business in the cryptocurrency industry, which we call crypto assets. Cryptocurrency is a new and risky asset class. Investing in such assets demonstrates that managers are willing to accept change in the financial markets. Investing in new assets and being wrong can lead to both reputational costs and career concerns. We examine the performance of institutions willing to make investments in this new industry relative to the performance of their peers who are not. The results show that institutions that invest in crypto assets outperform their peers by about 2.8% per year, suggesting that the willingness to invest in new and uncertain assets may be a predictor of institutional performance.

Keywords: Institutional investor; Cryptocurrency; portfolio performance; trading skill

JEL Classification: G11; G23