Digital assets have long been given the cold shoulder by institutional investors—but according to a new study, sentiment is starting to shift.
Almost 80% of institutional investors polled by Fidelity Digital Assets admitted they find something appealing in this asset class, and adoption levels are rising, the company said in a June 9 release.
Of those who revealed they have exposure to digital assets, more than 60% have made a direct purchase. More than one quarter of respondents confirmed they hold Bitcoin, while 11% own Ethereum.
“These results confirm a trend we are seeing in the market towards greater interest in and acceptance of digital assets as a new investable asset class,” Fidelity Digital Assets president Tom Jessop said. “This is evident in the evolving composition of our client pipeline, which spans from crypto native funds to pensions.”
Approximately 800 investors took part in the survey including financial advisors, pension funds, high net worth investors, crypto funds, and traditional hedge funds.
It’s worth noting that the research was conducted between November 2019 and the beginning of March—before the full economic extent of COVID-19 became clear.
When asked why they find digital assets appealing, 36% of institutional investors pointed to how they are uncorrelated to other asset classes, 34% noted how they were an innovative technology play, and 33% liked the high potential upside.
In Europe, 45% of respondents confirmed they are currently invested in digital assets, considerably more than the 27% of their U.S. counterparts.
That said, there was also a marked rise in the number of U.S. investors who have exposure to digital assets through cash and physically settled futures. The survey revealed 22% have made use of these financial instruments—a substantial rise from the 9% reported last year.
Perhaps unsurprisingly, crypto hedge and venture funds are likeliest to have an exposure to digital assets—however, 91% of respondents who have an interest in these investments expect to have at least 0.5% of their portfolio allocated to digital assets by 2025.
During a webinar to discuss the findings, Fidelity Digital Assets’ director of research, Ria Bhutoria, noted that the current state of digital assets is being regularly compared to gold in the 1970s—and name checked Paul Tudor Jones, the U.S. billionaire who recently declared that he is betting on Bitcoin to be the best-performing asset of the decade.
Increasing familiarity with digital assets will also undoubtedly drive adoption. With France’s central bank successfully testing a digital euro for the first time—and Libra embarking on a radical overhaul to win round regulators—the involvement of major economies and tech giants could prove crucial in giving institutional investors the confidence to take the plunge.
Bhutoria explained that “unconventional central bank decisions” in light of the coronavirus pandemic have meant investors need to find innovative ways to protect their wealth—and suggested this will have increased interest in digital assets, too.
“Since the survey concluded, zero and negative interest rate policy and unprecedented monetary easing has become a global phenomenon,” she said. “We’re already seeing more investors in the U.S. that are turning to digital assets and exploring digital assets given what they think will be a longer-term paradigm shift.”
Trust but verify
Although Fidelity’s findings are upbeat, there’s still a long way to go before digital assets are commonplace in the portfolios of institutional investors.
Three main obstacles were raised by the respondents: 53% mentioned price volatility, 47% highlighted market manipulation, and 45% expressed concern about a lack of fundamentals to gauge the appropriate value of digital assets. However, all of these figures are markedly lower than in 2019, when 66% had said they were worried about erratic price action.
“Investor concerns are largely focused on issues that will resolve themselves as the market infrastructure evolves,” Jessop added.
During the webinar, Bhutoria noted how the drop in these figures could be tied to the “significant improvements and growth in custody, trading, and derivatives platforms that are offering investors a user and customer service experience that they expect in traditional markets.”
It’s clear that the digital assets industry is already working overtime to address concerns over market manipulation and a lack of fundamentals. Just last week, a new benchmark index was launched that aims to offer a “robust” insight into Bitcoin’s actual price.
Digital assets grow up
Bhutoria pointed to the cryptocurrency industry’s growing use of very tough Service Organization Control (SOC) audits designed by the American Association of Certified Public Accountants that are carried out by independent audit firms, notably the Big 4.
“SOC audits are commonplace among traditional financial services and tech firms,” said Bhutoria.”So to the extent that it’s widely adopted by the digital asset industry, we think it gives investors another level of assurance in this space.”
Coinbase Custody completed its SOC audits in February, administered by global accounting firm Grant Thornton, and Fidelity-backed asset transfer platform Fireblocks passed a SOC 2 Type II audit by Big 4 firm Ernst & Young in December.
She added: “Also, a greater number of platforms are offering insurance solutions, which we think adds an additional layer of protection and peace of mind against loss or theft.”