Markets
Previews of 2023 and expectations for 2024
2024 has been an active year for crypto investments. Connor Farley by Truvius analyzes trends, interests, perceptions of institutional investments and their evolution in recent years.
I would like to welcome a new contributor, Marissa Kim from Abra Capital Management, which provides information in the Ask an Expert section on how to support clients’ interest in investing in cryptocurrencies.
Since 2019, the crypto-focused subset of Fidelity’s institutional business has released a survey titled the Institutional Investor Digital Assets Study, measuring trends in crypto investment sentiment and adoption among investors institutions from around the world.
Generally, the 2023 survey depicts a generally strong but still mixed institutional outlook toward crypto following a turbulent 2022.
Trends reflecting positive sentiment
Trends reflecting negative sentiment
It is important to note that the latest survey only extends from May 30, 2023 to October 6, 2023, missing a critical year-end period in which bitcoin rose from around $28,000 to $42,300 , largely in anticipation of the SEC’s approval of spot bitcoin ETFs. which happened later, in January 2024. Perceptions have likely shifted significantly since early 2024 after the crypto market cap soared above $2.5 trillion, which Bitcoin surged to nearly $74,000 and the SEC approved Bitcoin and soon Ether spot ETFs.
Arguably, the most important market moments in the history of digital assets occurred after this survey was conducted, namely actions aimed at reducing regulatory uncertainty, which could, in turn, reduce the price volatility and improve investment options for investors.
Will the SEC’s Surprise Approval of Spot Ether ETFs Ease Institutions’ Regulatory Concerns?
The digital asset market has started to move from early adoption to mass adoption. A sea change in industry leadership, product development, and fiduciary engagement has swept crypto in 2023 and early 2024, enabling a new suite of increasingly institutional on-ramps to class d ‘assets. It may take time for this change to trickle down more fundamentally to institutional allocations, but the rapid adoption of Bitcoin spot ETFs following SEC approval (aggregate ETF assets under management doubled , growing from around $30 billion in January to almost $60 billion in mid-June) could allow indications of stronger institutional interest in crypto.
Will concerns about price volatility persist?
The volatility of the digital asset class remains high compared to other asset classes, but it tends to decline over time and may continue to do so, as regulatory conditions improve and supply offerings improve. Products tailored to institutions potentially stabilize markets. Investors should also consider not only the volatility of cryptocurrencies, but also risk-adjusted return profile of various blockchain assets.
Will institutional investments be primarily directed towards BTC and ETH spot ETFs, or will they be split between investment structures (SMA, private funds, VC) providing diversified exposure to blockchain assets beyond the two mega-caps ?
Supported by major advances in industry infrastructure in 2023, spanning custody, trading and asset management, investors now have an enhanced – but still nascent – range of product options and platforms. ‘investment to not only help avoid early adopter risk pitfalls, but also leverage early adopter premiums. These options, in addition to ETFs, include the increasingly common SMA direct index vehicle.
With the combined rise of blockchain data providers and the growing presence of systematic digital asset managers, will institutions become more familiar with crypto fundamentals and methods of valuing digital assets?
Some 37% of respondents in 2023 cited “lack of fundamentals to assess appropriate value” as a barrier to investing. This high number reflects the emerging nature of the asset class and the learning curve associated with measuring blockchain value. However, this figure is down from 44% in 2021. It could continue to fall as investors become more familiar with blockchain technology and the unique ways to analyze a protocol’s value for users.
Q: What else should I think about besides buying and holding Bitcoin?
A: If clients want to gain exposure to digital assets, it is advisable to diversify this exposure, as you would with traditional assets. Bitcoin should be at the heart of every wallet. Nonetheless, there is an increasing focus on ETH and SOL as Ethereum becomes the chain of choice for institutional applications and Solana for consumer payment applications. Financial advisors should not leave their clients’ assets on the stock exchange, but use secure custody solutions to maintain ownership and access to their clients’ assets.
Q: Should I get exposure through ETFs?
A: While ETFs are convenient for retail investors, they lack the flexibility and opportunities offered by owning actual digital assets. Digital assets trade 24/7, unlike ETFs, which only trade during market hours. In addition, ETFs do not generate yield, which can constitute an interesting source of income and cannot be used as collateral for a loan. For customers with large BTC portfolios, borrowing against their digital assets may be preferable to selling and taxing capital gains.
Q. Which customer demographics are digital assets best suited to?
A: Understanding digital asset suitability requires assessing clients’ risk tolerance and wealth management goals. For low-risk clients, digital assets can serve as a store of value, with opportunities to generate attractive returns through staking. High-risk clients may instead wish to access venture capital investments in early-stage blockchain projects or higher-yielding DeFi investment strategies. Tailoring these approaches to individual needs allows digital assets to be integrated into a comprehensive wealth management plan.
Note: The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.