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Germany’s ‘Spezialfonds’ Investing in Crypto Face Liquidity Risk

A German law that allows Spezialfonds (special funds) to allocate as much as 20% of their assets to cryptocurrencies could pose a liquidity risk, Fitch Ratings said.

  • Spezialfonds are open only to institutional investors and had an estimated €2 trillion ($1.17 trillion) of assets under management at end-March 2021.
  • By bringing cryptocurrencies into the traditional, regulated financial system, the law passed earlier this year could also result in increased exposure to crypto assets for retail investors, whose insurance policies and retirement savings are managed by those institutions.
  • “If price volatility triggers trading breaks for exchange-traded cryptocurrency assets, this could make it more difficult for managers of cryptocurrency-exposed Spezialfonds to meet investors’ redemption requests or other obligations,” Fitch said.
  • The ratings company said it does not believe that allocations to crypto assets will reach close to the 20% allowed because Spezialfonds institutions are “traditionally risk-averse” in their approach to asset allocation.
  • If the funds were to invest the full amount allowed, Fitch calculates maximum crypto-asset investments of up to €360 billion ($422 billion) – which compares with bitcoin’s current market capitalization of around $860 billion.

 

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Indirect Crypto Investments for Commodities Fund

Exchange tokens and digital assets associated with proof-of-stake blockchain networks have outperformed the broader cryptocurrency market since the end of 2019, while privacy-focused digital tokens have underperformed, Goldman Sachs wrote in a new report.

“As the market matures, monitoring crypto’s market segments may help determine which network features investors are rewarding, as well as the prospect for practical applications of the technologies,” Zach Pandl, Goldman’s co-head of foreign-exchange strategy, and analyst Isabella Rosenberg wrote Wednesday in the report.

The publication of the report represents the latest iteration of the Wall Street firm’s on-again, off-again flirtation with cryptocurrencies. As recently as June, one Goldman division panned digital assets as not “viable” for client portfolios, but the company’s analysts continue to cater to institutional investors with in-depth examinations.

 

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