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Institutional sentiment points to increased adoption of digital assets

EY-Parthenon research indicates that digital assets continue to secure positions in the portfolios of institutional investors.

In brief
  • Institutional investors have increased allocations to digital assets and digital assets related products, and plan to continue to do so.
  • There is growing interest for investing in tokenized assets, particularly alternative assets, to drive portfolio diversification.
  • Lack of regulatory clarity and a perceived lack of trusted partners in the ecosystem are still key barriers to growth and adoption of crypto and tokenization.

The digital asset industry experienced significant volatility in 2023 with sustained regulatory enforcement, numerous bankruptcies and some high-profile scandals. Some pundits suggested blockchain might never be more than a novelty technology and digital assets¹ overall would be borne out as a passing fad. However, when we dive into the numbers, a different picture emerges for the measurable growth of digital assets as an investment and the nascent adoption of cryptocurrencies (“crypto”) and blockchain by institutional investors. This past year was a turning point for digital assets, gaining a foothold in mainstream financial markets and securing a place in the current portfolios and future plans of sophisticated market leaders.

Download the full survey here: Gaining Ground: how institutional investors plan to approach digital assets in 2024

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Sentiment and confidence in digital assets and blockchain are high

In March 2024, EY-Parthenon team conducted its second annual survey on institutional investors to gauge sentiment, investment to date and future plans relative to digital assets. This sentiment was measured across 277 participants from institutional asset managers, asset owners, family offices and hedge funds. The study was undertaken after the approval by the SEC of 11 Bitcoin exchange traded products (ETPs) and the subsequent sizable increase in crypto market capitalization ($2.3t at the time of the survey). The full study and report can be found linked below. 

Nearly all institutions (94%) believe in the long-term value of crypto/digital assets and/or blockchain technology

Digital asset institutional investors are:

*Digital asset-related products include funds, trusts, derivatives, etc.

In addition to believing solidly in the long-term viability of digital assets as an investment class, more than two-thirds of institutions are already invested in cryptocurrencies or other digital assets through funds or direct investments. Forty-two percent of institutions increased their allocations to digital assets in 2023, and now, with the advent of ETPs available for Bitcoin (BTC), 68% of institutions have or plan to invest in this registered vehicle. This existing and planned level of investment indicates steady growth of a willingness to invest in and a belief that digital assets are here to stay.

Allocations tell the story

When judging overall trends and levels of confidence, a leading indicator of trajectory is allocations. A little more than half of institutions expect to increase their allocations to digital assets and related products (e.g., funds, derivatives) over the next two to three years. Drilling down further, 38% of institutions have already committed between 1%-5% of funds to digital assets or crypto-related investments, and in the case of family offices, nearly half are in that allocation range. Traditional hedge funds are reaching for digital assets gains even more aggressively than their peers, with 22% allocating greater than 5% of funds.


How EY can help

Bitcoin ETPs changed the game

 

There is an emerging trend relative to how institutions are looking to gain exposure to cryptocurrencies, and it gives us a glimpse into how traditional financial institutions may play a larger future role in the crypto market. While 37% of institutions invest in spot crypto today, that number decreases to 32% when asked about plans for 2-3 years out. This decrease is illustrated further by comparison to last year’s data, when 52% of respondents expected to invest in spot crypto. The advent of registered vehicles, specifically the availability or foreseeable availability of Bitcoin ETPs across the US, UK, Hong Kong, Australia and other regions appears to have influenced future plans. On a two-to-three-year time horizon, across all types of institutions, 51% of the respondents’ plan on investing in mutual funds and ETPs that invest in crypto-related companies and 43% plan to invest in vehicles that own underlying crypto assets. That shift appears to illustrate a preference not only for regulated products, but also an underlying preference for familiar products that investors understand and have a higher confidence in sustained liquidity and secondary market activity. In fact, 62% of respondents noted that they would prefer to get exposure to crypto through registered vehicles where crypto is the underlying asset vs. acquiring spot crypto itself.


Innovation driving new investment opportunities

When considering how blockchain overall can impact the investing landscape, 50% of participants noted they were interested in investing in tokenized assets (e.g., funds, securities). Investors saw that investing in tokenized assets could provide benefits to portfolio diversification (65%), access to new asset types (58%) and greater liquidity (47%).


Some of the asset classes institutions would most like to access through tokenized assets were alternative funds (53%), public funds (46%) and real estate (38%). To date, much of the tokenization efforts by asset managers have been related to money market funds and treasuries, which have appealed to institutional investors looking to get yield out of their cash and move in and out of crypto markets. Tokenizing alternatives has the potential to enable access to a broader array of investors through lower minimums, and also the ability to enable diversification to larger institutional investors as they allocate to more alternatives, and drive liquidity once secondary markets are established.


While half of the institutional investors surveyed were interested in investing in tokenized assets, there was slightly less interest in the idea of undertaking tokenization of their own offerings for institutional asset managers – 44% of asset managers noted they are interested in tokenizing their own assets. Understandably, issues like skill sets, regulatory clarity and risk factors influenced the participants’ thinking related to offering their own products. For asset managers interested in tokenizing their own assets, alternative funds (66%), real estate (50%) and public funds (48%) were the top products.


Top considerations for asset managers in tokenizing their assets include: access to new investors and new capital (52%), cost savings/lower administrative fees (46%), and operational efficiencies (40%).


For those asset managers who did see themselves tokenizing assets in the future, partnering with another firm was the leading approach. Forty-six percent of respondents stated that partnering with a digital native firm, a consortium or other traditional finance firm would be part of their plan for tokenizing assets. Only 20% saw themselves building the internal infrastructure necessary for tokenization and an even smaller group, 16%, saw themselves acquiring the capability.


How EY can help

Seeking the familiar and trusted partnerships

The advent of registered vehicles over the past year will likely be viewed in the future as an important moment for digital assets in their integration into traditional financial markets. When summarizing the last year overall, with the survey data as the basis, six key takeaways emerged.

  1. Institutional investors have increased allocations to digital assets and digital assets related products, and plan to continue to do so.
  2. Primary demand for exposure to crypto has shifted from spot crypto in 2023 to a preference for registered vehicles in 2024, post the launch of Bitcoin ETPs after the SEC approvals.
  3. There is growing interest for investing in tokenized assets, particularly alternative assets, to drive portfolio diversification.
  4. Lack of regulatory clarity and a perceived lack of trusted partners in the ecosystem are still key barriers to growth and adoption of crypto and tokenization.
  5. Family offices and hedge funds have allocated higher percentages to digital assets and are more diversified in their investments across different tokens, compared to asset managers and asset allocators.
  6. Asset managers, particularly the larger ones with AUM >$500b, are more interested in launching both crypto funds and tokenized funds.

These summary points indicate the likely further adoption of digital assets as a core component of investor portfolios and setup the possibility for blockchain to expand its role as an important innovation in financial services.

 

Looking forward

Institutional investors will be on the forward-looking edge of increased allocations, the tokenization of assets and the creation of ecosystems, which will drive the digital assets market forward in the coming years. These actions will lay a foundation for additional investment and innovation as more market participants become comfortable with digital assets. As regulatory clarity arrives globally, we expect to see more and more participants embrace the benefits of portfolio diversification, access to new markets, greater liquidity and quicker settlement that come from blockchain-powered crypto and digital assets. In short, we expect investor demand to drive access to innovative future investment strategies.

 

Scott Mickey also contributed to the article.
Note: This article was authored right before the US Securities and Exchange Commission (SEC) approved the sale of spot Ether ETPs in the US on May 23, 2024.

Summary

As regulatory clarity arrives globally, we expect to see more participants embrace blockchain-powered crypto and digital assets for the benefits of portfolio diversification, access to new markets, greater liquidity and quicker settlement. In short, we expect investor demand to drive access to innovative future investment strategies.

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