Institutional Investors Increasingly Embrace Digital Assets: A Shift Towards 7% Portfolio Allocation by 2027

Growing Institutional Interest in Digital Assets

Institutional investors are poised to enhance their allocations in digital assets, aiming to reach an impressive 7% of their portfolios by the year 2027. This shift is part of a broader trend, with projections indicating that the market for tokenized assets could exceed $10 trillion by 2030. These findings emerge from a comprehensive report by The Economist, commissioned by the cryptocurrency exchange OKX.

Currently, asset managers are investing between 1% and 5% of their assets under management (AUM) in digital assets. According to the report, “The positioning of digital assets within institutional portfolios has primarily revolved around trading cryptocurrencies, notably bitcoin and ether, which have attracted significant investment.” However, there is a growing sense of optimism among institutional investors regarding digital assets. This optimism is fueled by the increasing availability of diverse investment vehicles that extend beyond mere cryptocurrencies.

Diverse Investment Opportunities

The report highlights that 51% of institutional investors are contemplating allocations in spot cryptocurrencies, while 33% are exploring staking opportunities. Additionally, 32% are investigating crypto derivatives, and 36% are interested in funds that track cryptocurrency performance. This trend reflects a broader shift in how institutional investors are approaching digital assets.

Furthermore, institutional investors are now looking beyond simple cryptocurrency holdings. They are beginning to consider various forms of digital assets, such as staking, crypto derivatives, and tokenized bonds. Notable examples in the market include:

• The European Investment Bank’s £50 million ($66 million) digitally native bond.
• $1 billion in tokenized U.S. treasuries.
• The HK$6 billion ($766.8 million) digital currency bond from Hong Kong.

The Role of Custodians

Custodians are becoming increasingly vital in facilitating institutional investors’ engagement with digital assets. The report mentions that 80% of traditional and crypto hedge funds surveyed currently utilize a custodian for their assets. In Asia, many crypto custodians are acquiring the same licenses as their traditional finance (TradFi) counterparts. For instance, Hong Kong’s Trust or Company Service Provider (TCSP) and Singapore’s Monetary Authority have developed their own frameworks for crypto custodianship.

Challenges Ahead

Despite the promising landscape, several challenges loom for institutional investors. One significant hurdle is the lack of regulatory uniformity across various jurisdictions. The report notes, “The absence of a cohesive regulatory framework introduces uncertainty, complicating compliance and risk management for institutional investors.” It praises Europe’s Markets in Crypto-Assets (MiCA) as an exemplary model of effective regional regulation.

Moreover, the report points out that differing regulatory approaches can lead to market instability, complicating institutions’ efforts to integrate digital assets into their investment strategies. Another concern raised is the fragmentation of liquidity within the digital asset markets. This fragmentation can cause market inefficiencies and hinder institutions from executing large-scale transactions effectively.

The report suggests that technology solutions, such as native token transfers, could address these liquidity challenges. Native token transfers allow for seamless cross-chain movement of tokens while preserving their unique characteristics and ownership, contrasting with wrapped assets that create multiple non-fungible versions.

This assessment from OKX aligns with recent findings from a Nomura survey, which revealed that 54% of Japanese institutional investors plan to invest in cryptocurrencies over the next three years. Furthermore, 25% of these investors hold a favorable view of digital assets, with a preferred allocation of 2% to 5% of their AUM.