Institutional Investors Continue to Increase Digital Asset Allocation: Economist Report

As a seasoned researcher with years of experience navigating the ever-evolving financial landscape, I find it fascinating to witness the growing interest and optimism surrounding digital assets among institutional investors. The projected growth of the market for tokenized assets is nothing short of astounding, and it’s clear that these institutions are eager to expand their horizons beyond simple cryptocurrency trading.

According to a recent report by The Economist, which was sponsored by OKX, institutional investors are planning to boost their holdings of digital assets to approximately 7% in the next five years. Moreover, it’s predicted that the market for tokenized assets will exceed $10 trillion by 2030, suggesting substantial expansion within this sector. However, potential hurdles lie ahead as outlined in the report.

At present, investment managers typically put a portion ranging from 1% to 5% of the funds they manage (their total assets under management or AUM) into digital assets.

As a crypto investor, I’ve noticed that most institutional investments in digital assets have primarily been centered on trading cryptocurrencies, with Bitcoin and Ether being the main paths. However, it seems that institutional investors are growing more optimistic about digital assets due to an increasing variety of investment opportunities beyond just cryptocurrencies, which is certainly encouraging.

According to the report, approximately half of institutional investors are contemplating direct investments in cryptocurrencies (51%), a third are examining the potential of staking digital assets (33%), around one-third are investigating crypto derivatives (32%), and just over a third are considering funds that follow cryptocurrency markets (36%) as part of their investment strategies.

An increasing number of institutional investors are broadening their digital asset portfolios beyond simply owning cryptocurrencies. This shift is evident with the rise in offerings such as staking, crypto derivatives, and tokenized bonds. For instance, the European Investment Bank issued a £50 million ($66 million) digitally native bond, while $1 billion worth of tokenized U.S. treasuries have been created, and there’s a HK$6 billion ($766.8 million) Hong Kong digital currency bond in the market as well.

Custodians are playing a crucial part in helping institutional investors adopt digital assets, as indicated by a survey where 80% of traditional and cryptocurrency hedge funds use custodians. In Asia, many crypto custodians are acquiring licenses similar to those held by their traditional finance counterparts, such as Hong Kong’s Trust or Company Service Provider (TCSP) license. Meanwhile, Singapore has established a unique regulatory framework specifically for crypto custodians, demonstrating the growing integration of digital assets into the financial sector.

But there are still challenges on the horizon, such as the lack of regulatory harmony.

The diversity in rules governing various regions leads to ambiguity, making it difficult for institutional investors to adhere to regulations, handle compliance issues, and mitigate risks connected to rule modifications. However, the report applauds Europe’s MiCA as a successful model of unified regional regulation.

As a crypto investor, I’ve noticed that different strategies being applied across various regions can create market volatility, making it challenging for institutional investors to seamlessly incorporate digital assets into their investment portfolios.

The report indicates that the division of liquidity is a worry for investors, because it can lead to market volatility and complicate the smooth execution of digital asset transactions for institutions.

As I delve into the intricacies of various blockchain networks and digital asset markets, I’ve come to understand that liquidity fragmentation could potentially result in price discrepancies, which presents a substantial hurdle for institutional investors looking to execute sizeable trades.

Attempts are being made to tackle this issue using technological advancements such as direct token transfers, a development that is viewed as an evolution within the realm of wrapped cryptocurrencies. In simpler terms, we’re trying to solve this problem by leveraging new technologies like direct token transfers, which are seen as a step forward in the progression of wrapped cryptocurrencies.

In simpler terms, native token transfers, as per previous reports from CoinDesk, facilitate smooth transitions of tokens across different blockchains, preserving each token’s distinct characteristics and ownership status. This is different from wrapped assets, which generate several unique, non-interchangeable copies instead.

The findings from OKX’s report align closely with those of a recent survey by Nomura. This survey revealed that approximately half (54%) of Japanese institutional investors are planning to invest in cryptocurrencies over the next three years, and among these, around one quarter (25%) hold a favorable opinion towards digital assets. If given the choice, they would allocate between 2% and 5% of their Assets Under Management (AUM) to this sector.