Digital Assets on the Rise
Among Institutional Investors

Growing Market Capitalization and Adoption

Not only are the headlines about institutional investors entering the crypto space growing but so too is the capitalization of digital assets. Cryptocurrencies still represent a relatively insignificant portion of the overall market compared to other popular asset classes. When compared to traditional assets such as precious metals, equities, and real estate, cryptocurrencies’ low market capitalization presents both unique opportunities and challenges. While cryptocurrencies have a smaller market cap, their potential for rapid growth and disruptive innovation is significant. The nascent nature of the digital asset market allows for greater volatility, but it also offers the potential for significant gains for investors willing to navigate this landscape.

Source: Statista, 2022

Unlike traditional assets, cryptocurrencies are not tied to physical locations or traditional financial systems, allowing for borderless transactions and global financial inclusion. Precious metals, stocks, and real estate, on the other hand, have long histories of serving as reliable stores of value and sources of passive income.

The EY-Parthenon team surveyed 256 institutional investor decision-makers worldwide, including COOs, CEOs, portfolio managers, and heads of transformation, to better understand how they view digital assets, including sentiment, digital-asset allocations, future expectations, and tokenization perspectives. According to the survey, 69% of investors anticipate growing their holdings of digital assets and related products in the next two to three years.

Source: EY, 2023

More and More Regulatory Clarity

Regulatory approval for digital assets is becoming more widespread around the world. If we look at how the world has changed between 2020 and 2023, we can see that countries all over the world have significantly loosened their regulations and become more accepting of digital assets.

Source: Eliptic, 2023

For example, Switzerland is a pioneer in the regulation of cryptocurrencies and is home to numerous blockchain foundations. The European Union Parliament just enacted the world’s most comprehensive regulation regarding digital assets, and France is a popular location for Web 3 businesses. However, there is a great deal of regulatory ambiguity in the United States with regard to digital assets as well as a political division in both the Senate and the House of Representatives with extreme opponents and extremely strong proponents. Since the country’s laws on assets have not been updated in almost seven decades, there is a rising worry that the nation may fall behind in the race for global technological superiority. Indeed, the United Arab Emirates’ (UAE) government is leading an effort to transform the country into a cryptocurrency center not just in the region but also worldwide. Additionally, the government of the United Kingdom has the goal of becoming a center for blockchain technology and investment. After cryptocurrencies were outlawed on the mainland of China in 2021, the Chinese government turned its attention to the country’s far-eastern province of Hong Kong. In 2023, the Chinese government designated Hong Kong as the future center for cryptocurrencies and established pro-cryptocurrency policies there.

There are encouraging signals that digital assets will become increasingly accepted on a worldwide scale, and it is reasonable to believe that other nations will follow Switzerland’s lead and play a pioneering role in this area.

Crypto Growth and Hedge Fund Interest

Although Bitcoin has received its fair share of negative attention, early-stage investments would have yielded an extremely high return.

Source: Statista, 2022

According to the findings of a poll conducted by PwC and published in their Global Crypto Hedge Fund Report 2023, 29% of hedge funds are now investing in crypto assets. Hedge funds that are dedicated to investing in this asset class have continued to add to their digital wallets, which now account for an average of 7% of their AUM, up from 4% in the previous year. It’s possible that a number of funds saw the fall in the larger market as a chance to invest at a more favorable level, which would have resulted in their expanding their exposure. The multi-strategy approach (41%), the systematic approach (29%), the macro approach (12%), and the equity approach (12%) are the most common techniques used by hedge funds when investing in crypto assets. The capitalization of the market for crypto assets by the end of 2023 is expected to exceed its level at the end of 2022, according to forecasts made by 93% of crypto hedge funds.

Source: PwC, 2023

Wall all Street Takes a Position

Wall Street firms generally have diverse opinions on Bitcoin (BTC) and digital assets. Some have published research reports detailing their investment theses for Bitcoin and have even put price targets on it. Others have remained firm in their distrust of Bitcoin and digital assets and are unlikely to change their stance. Despite this diversity of opinions, many top financial institutions have provided their customers with avenues for investing in digital assets. Some have gone as far as entering strategic partnerships with or taking ownership stakes in digital asset startups.

Fidelity was one of the early adopters of Bitcoin; as early as 2014, they began mining BTC. In October 2018, the company launched Fidelity Digital Assets, a standalone subsidiary providing BTC custody and trade execution for institutional investors. In October 2022, the company announced that it would launch support for Ethereum (ETH) custody and trade execution.

In November 2022, the company began rolling out access to Fidelity Crypto, which allows retail users to buy and sell BTC and ETH directly from the Fidelity Investments app and leverages Fidelity Digital Assets’ trading and custody platform.

Massachusetts Mutual Life Insurance Company also acquired a minority stake in NYDIG, a full-stack BTC platform focused on making BTC accessible. At the time of its initial investment, the company also made a $100 million BTC purchase facilitated by NYDIG for its general investment account. In August 2021, the company announced that its broker-dealer, MML Investors Services, would grant qualified clients access to BTC via a fund issued by
NYDIG.

Morgan Stanley, Goldman Sachs, Citigroup, and JPMorgan Chase have also begun offering their clients digital assets via funds, partnerships, and platforms. In March 2021, Morgan Stanley started offering digital assets to its wealthy clients via three funds, two from Galaxy Digital and the third via a joint effort of FS Investments and NYDIG. In May 2021, Goldman Sachs began offering exposure to BTC via derivatives trading for its clients and later announced it would add support for ETH derivatives in June 2021.

In conclusion, despite Wall Street firms’ diverse opinions, many have begun to offer digital assets to their clients via funds, partnerships, and platforms. The entry of these financial instill tutions into the digital asset market is a sign of increasing mainstream acceptance and adoption of BTC and other digital assets. However, time will tell if these investments will be beneficial to shareholder value over the long term.

Current State of Institutional Adoption

Corporations are beginning to include BTC on their balance sheets as part of a treasury management strategy. In August 2020, U.S.-based business intelligence company MicroStrategy converted $250 million of its treasury reserve into BTC. As of November 15, 2022, it held 130,000 BTC (worth ~$2.2 billion at the time), which accounted for 0.7% of all BTC in circulation. Tesla also followed in MicroStrategy’s footsteps in February 2021 and purchased 48,000 BTC (worth ~$1.5 billion at the time) to diversify and maximize returns on cash.

However, it is still unknown how committed these firms are to their investments over the long term. Tesla sold 75% of its BTC in Q2 2022 to boost liquidity amidst uncertainty stemming from extended lockdowns in China. As of September 30, 2022, MicroStrategy’s BTC holdings had a cost basis of $4 billion while their market value stood at $2.5 billion, representing a$1.5 billion unrealized loss.

Source: bitcointreasuries.net

Bitcoin Halving to Boost Interest of Investors in 2024

The halving of the BTC supply is a significant event that takes place once approximately every four years and is an essential component of the architecture of the cryptocurrency that aims to regulate its supply as well as inflation. It is anticipated that the next BTC halving will take place in 2024. During this halving, the reward that BTC miners receive for successfully verifying transactions will be cut in half, therefore slowing the rate at which new Bitcoins are produced. This strategy for establishing scarcity is designed to simulate the shortage of valuable metals such as gold, which will result in a deflationary impact over the course of time. The halving will have significant effects on the market for digital assets, particularly with regard to the dynamics of supply and the movements in price. The decrease in the amount of fresh supply that is being introduced into the market typically results in an increase in demand as the scarcity factor becomes more pronounced, which frequently causes prices to rise. This phenomenon has attracted the attention of institutional investors, who are increasingly intrigued at the possibility that BTC might serve as a hedge against swings in prices of traditional fiat currencies and uncertainty in the macroeconomy. The effect that the halving will have on supply and the price dynamics that will follow will enhance BTC’s image as a digital store of value. This is something that will resonate well with institutional investors looking for both diversity and long-term stability within the domain of crypto assets.

Source: ZenLedger, 2023

Conclusion

Digital assets are still in their infancy and present intriguing opportunities for institutional investors. Moreover, acceptance of digital assets is increasing on a global scale across regulators, financial institutions, and institutional investors. The evolution of market cycles, as well as the impending BTC halving, may have a positive impact on the development of digital assets. At FiCAS, we anticipate that adoption will increase in the coming years, as will regulatory clarity, demystifying digital assets. Therefore, institutions should engage with and understand the digital-asset class to avoid missing lucrative investment opportunities in
innovative assets.