For decades, the playbook for sophisticated institutional investing has been guided by a core principle, famously championed by Yale’s legendary David Swensen: lock up capital in illiquid assets to capture a premium. This “endowment model,” which allocates heavily to alternatives like private equity and venture capital, has conditioned a generation of investors to believe that patience and illiquidity are the keys to superior returns.
However, in the fast-paced, volatile world of digital assets, this time-tested model may not just be outdated—it may be entirely backward.
According to Jeff Park, Active Portfolio Manager at Bitwise Asset Management and CIO at ProCap BTC, institutions applying their traditional playbook to crypto are missing the asset class’s most unique and powerful advantage: liquid alpha.
The Old Guard vs. The New Asset
David Swensen’s philosophy cemented the belief that illiquid, long-term investments justify their extended lockups by delivering outsized returns. This illiquidity premium has been the holy grail for endowments, pension funds, and family offices. But Park contends that crypto operates by a completely different set of rules.
“In crypto, I believe the term structure is in backwardation, where investors are overcompensated to invest at the near end of the curve versus the long end,” Park explained in a recent post. “You are paid handsomely to take liquid risks where the scorecard is generated every day without having to wait ten years.”
This is a direct challenge to the foundational logic of institutional portfolio theory. Instead of being penalized for liquidity, Park argues that in crypto, you are rewarded for it.
Volatility: A Feature, Not a Bug
To illustrate his point, Park highlights the performance of liquid trading strategies during periods of market stress. In early April 2024, as Bitcoin fell 7%, many investors felt the sting of volatility. Yet, at the same time, certain strategies thrived. Park noted that market-making strategies annualized at an impressive 70%, while arbitrage strategies delivered 40% returns.
These are not hypothetical gains; they are real-time opportunities generated by the very market volatility that institutions often seek to avoid.
“If the S&P 500 carried realized volatility near 70%, private equity return expectations would look entirely different,” Park stated, framing crypto’s volatility as a distinct advantage. It unlocks a constant stream of short-term opportunities that large institutions could harness without waiting a decade for a venture investment to mature.
The Institutional Misstep: Chasing Illiquid Crypto
Despite this unique market structure, many institutions continue to fall back on familiar patterns, allocating heavily to crypto venture capital (VC). While a natural extension of their traditional playbook, Park believes this overlooks the sheer scale and efficiency of liquid crypto markets.
In May alone, liquid crypto markets traded over $2.5 trillion in spot assets and another $2.5 trillion in Bitcoin futures. This dwarfs the capacity of the crypto VC space.
“The liquid crypto market is undoubtedly more scalable for institutions versus the venture market, which by definition must be capacity constrained for alpha generation,” Park argued. By focusing on illiquid venture deals, institutions are not only misinterpreting the nature of the asset class but are also limiting their ability to deploy capital at scale.
Channeling an Iconoclast’s Spirit
Perhaps the most compelling part of Park’s argument is his appeal to the spirit of David Swensen himself. Swensen was an iconoclast who succeeded by defying conventional wisdom. Park suggests that if Swensen were evaluating crypto today, he might appreciate the unconventional approach that liquid alpha strategies represent.
Quoting the legendary CIO, Park said, “Establishing and maintaining an unconventional investment profile requires accepting uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.”
Park’s retort is simple: “Sounds like crypto to me.”
The message is clear: the next great innovator in institutional investing won’t be the one who successfully forces crypto into a private equity-shaped box. It will be the one who recognizes that crypto’s greatest strengths—its liquidity, its volatility, and its 24/7 market structure—are the very sources of its most compelling returns. For institutions willing to rewrite their playbook, the era of liquid alpha has already begun.
