Institutional Investors Adoption Of Digital Assets

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Financial Services Institution Fidelity, recently released a report indicating that a third of institutional investors own digital assets such as Bitcoin. The report which surveyed 800 institutional investors across the globe, also found that European institutions (45%) were much more likely to hold digital assets compared to their American counterparts (27%).

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What Does The Adoption Of Digital Assets Mean For The Traditional Markets?

What does the growing appetite for digital assets among institutional investors mean for traditional markets? And why is digital asset investment growing in Europe at a faster rate than the US? We have gathered commentary from industry experts including AVA Labs, Securrency, and METACO, available below.

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John Wu, President at AVA Labs commented: 

"This research makes it clear that institutions now have the expertise, tools, and economic incentive to take action and invest in cryptocurrencies and digital assets. First and foremost, institutional investors have made tremendous progress in sorting the facts from fiction across the cryptocurrency ecosystem, and now have a firm understanding of the real-world value and potential of the crypto asset class. 

At the same time, core infrastructures like custodians and trading technologies have matured and are now offered by established firms like Fidelity. Add the backdrop of macroeconomic uncertainty, extensive fiscal policies, and fears of monetary inflation, and the barrier between crypto being a mainstream, investable asset class isn't as insurmountable as years past. These factors are helping to legitimize crypto to traditional institutions, and have opened the door for the next wave of investment.”

Seamus Donoghue, VP Sales and Business Development at METACO commented: 

Fidelity’s report confirmed a trend that I’ve observed over the last year: the institutional adoption of digital assets has been growing and broadening. As the report points out, the majority of early adopter institutional investors have so far been sector focused crypto or venture funds, High-Net-Worth-Individuals, or individuals and family offices. Adoption has now shifted from those early adopters to Tier 1 and 2 global financial firms such as investment banks, infrastructure banks, and legacy exchanges—many of which are very well known brands.

The last few months have seen a distrust in financial markets become increasingly pervasive. Recent central bank policy, although a catalyst for broad market recoveries, is again raising questions of longer term fiat sustainability as a store of wealth—just as occurred in the global financial crisis of 2008-2009 when Bitcoin was born. It is clear that investor appetite is near an inflection point that could really accelerate adoption.

The obstacle for large institutional money entering the sector is in the onramps to digital assets: the legacy banks and brokers that service mainstreet, asset managers and pension funds have been slow to add the capacity to service investor needs. The alternative has been for individuals and institutional investors to seek out specialist firms and undergo new onboarding, requiring significant adjustment to get funds into such firms. This also raises the question of the counterpart risk of leaving crypto in such a firm’s custody. 

Self-custody would be a game-changer if the main investment banks and brokers offered access, but until that point there remains a significant barrier to entry to the market, when in comparison purchasing equities requires a simple click. Once the incumbent players in financial markets offer access, adoption will significantly increase. If you can trade Bitcoin futures through the same broker and exchange that you trade Eurodollar futures, the ease of access and seamless integration with your existing rails removes the barriers to entry to crypto futures markets. 

Gaps in the regulatory environment between the US and other parts of the world, explain figures from Fidelity’s findings that 27% of institutional investors in the U.S. and 45% in Europe are invested in digital assets. In jurisdictions where regulators have a clear taxonomy for crypto and a licensing regime such as Germany, Switzerland, Japan, and Singapore, the legacy banks can and will build capabilities. With the acceleration we see in Europe, particularly in markets like Germany, that adoption gap between the US will only widen over the next year. 

European banks have the potential to emerge as the global crypto leaders as investors seek trustless safe havens such as Bitcoin. This trend is not going unnoticed by the US banks that currently dominate global markets. Once US regulators align and provide their banking sector with clear guidance, the market will also see explosive growth in the US.”

Manuel Rensink, Strategy Director at Securrency commented: 

It is difficult to pinpoint a precise cause as to the greater adoption of digital assets in Europe by institutional investors, but one can surmise that there are two broad issues that contribute to this phenomenon. First, the depth and breadth of the US market offers more existent variety, resulting in a lower sense of urgency among US investors to seek alternatives. Second, the different regulatory approaches almost certainly contribute to this. The ability of different European national regulators to innovate somewhat independently with respect to digital assets has led to clarity in places like Switzerland, and regulatory clarity is a key contributor to institutional and even retail adoption. By contrast, the fragmentation and overlap among US regulatory authorities tends to yield a more methodical, cautious approach. Innovation is certainly explored by US regulators, but implementation often lags well behind. One might also consider a third factor, one based on cultural differences. Europeans tend to be more mobile and apt to travel from place to place, so perhaps it is not surprising that they are quicker to adopt more agile forms of investment and finance.

Although crypto was originally touted as a global medium of exchange, in reality the “killer app” of crypto appears to be speculation, and futures are a useful tool for leverage and arbitrage. The more cynical may attribute institutional interest in this space to be reflective of the significant information advantage held by large institutions in a market with relatively large spreads. A more charitable view would be that institutions prefer the futures market because it fits within their existing investment mandates and allows them to mitigate against custodial risk and the provenance of potentially “dirty” coins. Whatever the case, crypto futures appear to be well on their way to becoming a de rigueur component of institutional investment.”