Why institutions are banking on digital assets in 2024

The increasing participation of institutions in the cryptoasset space is significant and indicates a maturing market. Most investing institutions allocate 1-5% of their portfolios to digital assets, with 60% of respondents allocating over 1% to digital assets. These are welcome statistics as institutional involvement brings stability and liquidity to the digital asset ecosystem, making it more attractive to a broader range of investors.

Anticipating increased institutional participation in 2024

Despite Bitcoin's price performance following ETF approvals, institutional interest has surged. While there has been a decrease in active BTC addresses since ETFs were launched, the volume of BTC token transfers has risen, indicating significant institutional interest. 

One CryptoQuant analyst noted a decline in the count of active addresses involved in BTC transactions post-ETF approval, suggesting a shift in network activity. However, this decline was interpreted as potentially positive, attributing it to institutional capital entering the market. The last trading week saw a spot BTC ETF volume of $1 billion, although it marked a decline of 37%. Despite this, sentiment appears to be improving, with BTC's price chart showing a shift from bearish to bullish sentiment. Key indicators such as the Moving Average Convergence Divergence (MACD), Relative Strength Index (RSI), and Money Flow Index (MFI) suggest a growing buying pressure, indicating a potential uptrend in BTC's price.

Many believe the cryptoasset market is gearing up for a substantial uptick in institutional interest. Industry experts, including Mathew McDermott of Goldman Sachs, foresee enhanced market liquidity and more cautious institutional investors entering the market, such as pension funds and insurance companies, due to the approval of spot Bitcoin and Ether ETFs earlier this year. In addition, tokenisation is anticipated to streamline transactions across various asset classes. J.P. Morgan is exploring ways to expand its asset tokenisation platform, which has already traded over $785 billion in notional value. Meanwhile, Goldman Sachs Group Inc. aims to increase the issuance of tokenised securities through its digital-asset platform, launched in November.

Analysts suggest that potential interest rate cuts by the Federal Reserve could heighten institutional interest in assets like Bitcoin. Regulatory clarity, such as the EU's MiCA legislation and progress in jurisdictions like Singapore and Hong Kong, also play a pivotal role in encouraging institutional participation. However, it is important to caution against overlooking potential macroeconomic uncertainties, such as a recession or monetary tightening by the U.S. Federal Reserve, which could slow down the growth of the digital asset market.

Factors driving institutional interest

Banks and asset management firms are increasingly exploring digital assets like Bitcoin for portfolio diversification. Stocks, bonds, and commodities typically dominate traditional portfolios, but adding Bitcoin as an alternative asset class can provide attractive returns and reduce risk. By diversifying with Bitcoin, financial institutions seek to boost portfolio performance while minimising exposure to market volatility.

Another significant motivation driving financial institutions' interest in Bitcoin is its potential role as a hedge against economic uncertainty and inflation. According to VanEck, with global purchasing power eroded by current monetary stimulus, Bitcoin may excel due to its immunity to the inflationary manipulation affecting traditional currencies. Bitcoin's decentralised nature and limited supply make it immune to the whims of central banks and government policies. As traditional currencies face the risk of devaluation due to inflationary pressures, some financial institutions view Bitcoin as a safeguard for preserving wealth as a long-term store of value. By allocating a portion of their assets to Bitcoin, financial institutions aim to mitigate the impact of inflation and protect their clients' wealth.

Bitcoin's historical price performance and volatility have attracted investment firms seeking new opportunities to outperform traditional markets. While Bitcoin's volatility poses a risk, it also presents significant profit opportunities for investors with the on-hand expertise to navigate the market.

XEROF's Bitcoin AMC

XEROF's Bitcoin Active Managed Certificate (AMC) offers institutional investors an effective way to gain exposure to Bitcoin without direct ownership. The certificate, backed by Bitcoin and held in secure cold storage by a Swiss bank, provides daily liquidity through XEROF's cryptoasset brokerage exchange. This structure enables institutions to diversify into cryptoassets seamlessly while retaining Assets Under Management (AUM) and simplifying secure cryptoasset custody. 

If you want to learn more about the benefits of XEROF’s Bitcoin AMC for institutions or have any questions, please contact us here.

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