According to a report by Fidelity Digital Assets, institutional investors across the U.S and Europe are expressing more interest in cryptocurrency allocation. The growth over the last year has been attributed to traditional markets. With uncertainties still mounting within the global economy, institutional investors are looking for alternative / uncorrelated opportunities.
The report by Fidelity took place between November 2019 and March 2020. During this timespan, about 800 institutional investors from the U.S and Europe were surveyed. The study showed that around 36% of institutional investors are currently investing in cryptocurrencies. The following entities accounted for the 800 institutional investors:
- Financial Advisors
- Family offices
- Traditional & Crypto Hedge Funds
- High net worth investors
- Endowments & foundations
The report outlines that institutional investors have the most interest in Bitcoin and Ethereum at this time. Among these entities above, 91% believe that they will allocate at least 0.50% of their assets in cryptocurrencies in the next 5 years. It’s important to note that institutional investors continue to express interest in digital asset futures. 22% of the participants surveyed said that futures were the way they were gaining exposure to digital assets. This is up significantly from 2019, in which only 9% were involved in digital asset futures.
What Institutional Investors Find Appealing About Digital Assets
Among the 800 participants, here are the top reasons they are investing in digital assets:
- Uncorrelated to traditional assets
- Innovative technologies
- Potential upside
What Institutional Investors Find Unappealing About Digital Assets
- Current price volatility
- Potential market manipulation
- Lack of valuation metrics
Solidifying The Narrative
So far this year, we’ve seen a lot of signs regarding institutional interest in cryptocurrencies. Most of this has surfaced during COVID-19, causing financial uncertainties globally. With the Federal Reserve injecting trillions of dollars and recently maintaining near zero interest rates, Wall Street predicts high amounts of inflation in the future. That’s why industry veterans like Paul Tudor Jones have attached to Bitcoin this year. Paul Tudor Jones believes that Bitcoin will be the ultimate hedge against inflation. In addition, the Fidelity report is not the only report showing institutional adoption. As Visionary Financial recently reported, Grayscale Investments is seeing record growth in Hedge Fund adoption. Hedge Funds are pouring into the largest digital asset investment firm, showing most interest in Bitcoin and Ethereum. The recent report by Fidelity validates that the move into digital assets is only growing on a global basis.
Addressing Investor Concerns
Among the 800 entities surveyed, it was interesting to see the areas they were most uncertain about. For the longest time now, many people in the digital asset space believed that the lack of “custodial services” was holding back institutional adoption. What we can debunk from the Fidelity report is that this may not be the case.
As outlined above, the three biggest concerns were volatility, manipulation, and lack of valuation metrics. The lack of custodial solutions wasn’t really addressed. This was interesting, especially since institutional investors tend to place a premium on custodial solutions for their clients. If we remember from before, it was mentioned that digital asset futures saw significant growth since 2019. Opposed to these entities relying on custodians, it seems like they’re focusing on diversifying through future contracts. In doing so, the firms take less risk by receiving cash at settlement opposed to actual Bitcoin. Moving forward, it will be interesting to see if institutional interest in futures keeps going up. If so, it would further support our theory that large investors simply don’t want to deal with actual digital assets.
In terms of digital asset volatility, this was another area that was questionable. Despite volatility being a concern for institutional investors, the data shows otherwise. In a recent report, Bitcoin volatility had fallen significantly since 2019. As a matter of fact, Bitcoins 1 year volatility was lower than oil and emerging currencies. As time progresses, we expect that institutional investors will shift their viewpoint around volatility. If this study was initiated in 2020 instead of 2019, this probably would have been the case. Bitcoins volatility wach much higher in 2019, which most likely was a concern at the time.
The concerns around digital asset valuation can be justified. As adoption grows in cryptocurrencies, institutional investors will shift their valuation techniques. Since digital assets like Bitcoin have little to no traditional metrics, you will start to see other tools being used. In terms of fundamentals, there’s all sorts of tools such as network momentum, mayer multiples, and studying market value to realized values. These are all areas that we believe are foreign to institutional investors right now. As time progresses, we expect entities to leverage these fundamentals to address potential. As of recent, Visionary Financial used some of these fundamentals to argue the “undervaluation” of Bitcoin.
We believe that digital asset manipulation is one of the strongest arguments at this time for institutional adoption. It’s difficult because you have many investors seeing opportunity in this asset class, yet the regulatory framework is still in process. According to a study by Brookings, allegations of manipulation are still a popular topic, and a frequent event in crypto. During the last couple years, protocols like Tether ( U.S. dollar peg ) have been affiliated to potential Bitcoin manipulation. In addition, crypto exchange maturation has been slow, resulting in various breaches. Companies like BitWise have also argued that 95% of crypto volume reporting is fabricated. These are all issues that institutional investors have to navigate through. We also believe it’s the reason behind a surge in futures interest. Institutional investors have little interest in taking this systematic risk for their clients. If these firms/individuals can diversify in digital assets through futures, then it reduces systematic risk drastically. These firms don’t have to worry about the risks associated with holding digital assets on various platforms. Until the industry matures, we think that manipulation will be the number one driver keeping investors out of the market.
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