Crypto for Advisors: Crypto Trends

2024 has been an active year for crypto investments. Connor Farley from Truvius breaks down institutional investment trends, interests, perceptions, and how they have evolved over recent years.

I’d like to welcome a new contributor, Marissa Kim from Abra Capital Management, who provides insights in the Ask an Expert section about supporting client’s investment interest in cryptocurrencies.

Since 2019, the crypto-focused subset of Fidelity’s institutional business has published a survey called the “Institutional Investor Digital Assets Study,” measuring trends in sentiment and adoption of crypto investing among institutional investors globally.

Overall, the 2023 survey depicts a generally sturdy but still mixed institutional outlook toward crypto on the back of a turbulent 2022.

Trends Reflecting Positive Sentiment

Trends Reflecting Negative Sentiment

It’s important to note the latest survey only spans May 30, 2023, to Oct. 6, 2023, missing a critical year-end period during which bitcoin rose from approximately $28,000 to $42,300, driven largely by anticipation of the SEC’s approval of spot bitcoin ETFs which occurred later, in January of 2024. Perceptions have likely evolved meaningfully since the start of 2024 following crypto’s market capitalization climbing above $2.5 trillion, Bitcoin surging to nearly $74,000, and the SEC’s approval of bitcoin and soon Ether spot ETFs.

Arguably, the biggest market moments in the history of digital assets occurred after this survey was conducted, namely actions that reduce regulatory uncertainty, which may, in turn, reduce price volatility and improve investment options for investors.

Will the surprise SEC approval of spot Ether ETFs diminish regulatory concerns among institutions?

The digital asset market has begun transitioning from early adoption to mass adoption. A sea change in industry leadership, product development, and fiduciary commitment swept crypto in 2023 and early into 2024, enabling a new suite of increasingly institutional-grade on-ramps into the asset class. This change may take time to permeate through to institutional allocations more foundationally, but the rapid adoption of spot bitcoin ETFs following the SEC’s approval (aggregate ETF AUM doubled from approximately $30 billion in January to nearly $60 billion as of mid-June) may provide early indications of stronger institutional interest in crypto.

Will concerns about price volatility persist?

Volatility for the digital asset class remains elevated compared to other asset classes, but it has trended down over time and may continue to do so as improving regulatory conditions and institution-friendly product offerings potentially stabilize markets. Investors should also consider not just crypto volatility but the risk-adjusted return profile of various blockchain assets.

Will institutional investments flow primarily into spot BTC and ETH ETFs, or will they be spread across investment structures (SMAs, private funds, VC) offering 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 a better – but still nascent – array of product options and investment platforms to not only help avoid the pitfalls of early-adopter risk but also to exploit early-adopter premia. These options, in addition to ETFs, include the increasingly prevalent SMA direct-index vehicle.

With the combined surge in blockchain data providers and the growing presence of systematic digital asset managers, will institutions become more familiar with crypto fundamentals and methods of digital asset valuation?

Some 37% of 2023 respondents cited a “lack of fundamentals to gauge appropriate value” as a barrier to investing. This large number reflects the asset class’s emerging nature and the learning curve associated with measuring blockchain value. However, this number is down from 44% in 2021. It may continue to fall as investors become increasingly familiar with blockchain technology and the unique ways to analyze a protocol’s value to users.

Q: What else should I be thinking about aside from buying and holding Bitcoin?

A: If clients want exposure to digital assets, it’s advisable to diversify that exposure, as you would with traditional assets. Bitcoin should be the core of every portfolio. Still, consideration is increasingly being given to ETH and SOL, given that Ethereum is becoming the chain of choice for institutional applications and Solana is for consumer payment applications. Financial advisors should not leave their clients’ assets on exchanges but utilize secure custody solutions to retain ownership and access to their client’s assets.

Q: Should I get exposure through ETFs?

A: While ETFs are convenient for retail investors, they lack the flexibility and opportunities available from holding actual digital assets. Digital assets trade 24/7, unlike ETFs, which only trade during market hours. Moreover, ETFs do not enable yield generation, which can be an attractive income stream and cannot be used as collateral for borrowing. For clients with large BTC portfolios, borrowing against their digital assets may be preferable to selling and incurring capital gains tax.

Q. Which client demographic are digital assets most suitable for?

A: Understanding the suitability of digital assets requires assessing clients’ risk tolerance and wealth management goals. For low-risk clients, digital assets may serve as a store of value, with opportunities to generate attractive yields through staking. High-risk clients may instead desire access to venture capital investments in early-stage blockchain projects or higher-yielding DeFi investment strategies. Tailoring these approaches to individual needs helps integrate digital assets into a comprehensive wealth management plan.

Note: The views expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.