A growing number of institutional investors believe that digital assets should be a part of their investment portfolios, according to new research from US multi-trillion-dollar financial investment company Fidelity.
More US investors are finding appeal in digital assets vs. a year ago but, interestingly, investors in Europe are more likely to own digital assets and have a more progressive view of the asset class than American investors, according to the report.
Commenting on the survey findings, Tom Jessop, president of Fidelity Digital Assets said:
“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. This is evident in the evolving composition of our client pipeline, which spans from crypto native funds to pensions.”
Digital assets are gaining in favorability and appeal amongst institutional investors, with almost 80 percent of investors surveyed finding something appealing about the asset class. In a comprehensive survey of almost 800 institutional investors across the U.S. and Europe, 36 percent of respondents say they are currently invested in digital assets, and 6 out of 10 believe digital assets have a place in their investment portfolio. These and other findings from a Fidelity Digital Assets survey cast an in-depth light on a class of investors who have widely been expected to lead the broad adoption of digital assets.
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, the 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 require 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.”
The research, which was conducted from November 2019 to early March 2020, sought to understand institutional interest and adoption of digital assets, as well as the key barriers to participation in the asset class. Nearly 800 U.S. and European investors were surveyed, including financial advisors, family offices, pensions, crypto and traditional hedge funds, high net worth investors, and endowments and foundations. This marks the second consecutive year that Fidelity has conducted this survey amongst U.S. institutional investors and the first for European investors, highlighting the company’s increased focus on industry-leading research to foster adoption and add value to clients.
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 offer 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 tend 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.”
Digital Asset Ownership
Thirty-six percent of respondents (27 percent in the U.S. and 45 percent in Europe) say they are currently invested in digital assets. The survey revealed higher penetration with crypto hedge and venture funds, as expected, but also the financial advisor, high net worth individual and family office segments.
U.S. investors allocated to digital assets increased to 27 percent from 22 percent in 2019. Of all U.S. and European investors who have exposure to digital assets, over 60 percent buy digital assets directly. Fifty-nine percent of US investors who currently invest are invested directly, up from 55 percent in the 2019 survey. And amongst the backdrop of recent market growth in the number of crypto native and incumbent service providers offering cash and physically settled futures contracts, 22 percent of U.S. respondents invested in digital assets have exposure via futures, which is a substantial increase relative to 9 percent of U.S. investors surveyed in 2019.
Bitcoin continues to be the digital asset of choice with over a quarter of respondents holding bitcoin; 11 percent have exposure to Ethereum.
Looking out five years, 91 percent of respondents who are open to exposure to digital assets in a portfolio expect to have at least 0.5 percent of their portfolio allocated to digital assets. Amongst U.S. respondents, this number is up by 9 percentage points vs. 2019 from 79 percent to 88 percent.
Over the past year, the market has witnessed the improved performance of digital assets, the entrance of incumbent service providers, and increasing coverage of the industry by mainstream financial firms through constructive research – all factors that may contribute to the upward trend in digital asset ownership among institutional investors.
The appeal of Digital Assets
Almost 80 percent of institutional investors find something appealing about digital assets, with the three almost equally compelling characteristics across U.S. and European investors being: uncorrelated to other asset classes (36 percent); an innovative technology play (34 percent); and high potential upside (33 percent). Amongst U.S. respondents, the portion of investors who find appealing characteristics in digital assets grew by six percentage points to 74 percent this year. European investors are even more positive on digital assets with 82 percent finding something appealing.
A notable contrast is that 25 percent of European investors find the fact that certain digital assets are free from government intervention to be appealing, whereas only 10 percent of investors in the U.S. feel this way.
Digital Assets Within a Portfolio
The majority of institutional investors (6 in 10) feel digital assets have a place in their portfolio, though opinions vary on precisely where. Nearly 40 percent of institutional investors believe digital assets belong in the alternative asset class, while 20 percent of investors believe they belong in an independent asset class. Those investors may see certain advantages in digital assets over traditional alternatives such as hedge funds, private equity, real estate, etc. in that they are relatively more liquid, have low transportation, transaction and storage costs and have unique return drivers.
Factors Slowing Institutional Adoption
Despite the upward trending number of institutions adopting digital assets, some reticence remains. Among the obstacles to digital asset adoption cited were price volatility (53 percent), concerns around market manipulation (47 percent), and lack of fundamentals to gauge appropriate value (45 percent). Encouragingly, among U.S. respondents, the strength of concerns decreased notably vs. last year across most factors. Price volatility concern fell 13 points, concerns around market manipulation fell 6 points and lack of fundamentals fell 8 points.
“Investor concerns are largely focused on issues that will resolve themselves as the market infrastructure evolves,” said Jessop. “We’re proud to be one of many service providers actively driving that evolution for the benefit of the ecosystem and traditional investors alike.”
The blind survey was executed in association with Greenwich Associates on behalf of Fidelity Digital Assets and the Fidelity Center for Applied Technology between November 18, 2019, and March 6, 2020. The survey including 774 institutional investors in the U.S. (393) and Europe (381) including pensions, family offices, digital and traditional hedge funds, financial advisors and endowment and foundations.
Also published on Medium.