The Bitcoin (BTC) bullrun brought digital assets mainstream - once again, after its 2017 hype. Media from various countries headline the oldest cryptocurrency as it breaks one all time high after another, and famous investors increasingly talk about it publicly. Interestingly, big corporations and institutional investors have revealed positions in Bitcoin in 2020 - something that was not seen before. This new interest of large players raises the question whether cryptocurrencies have finally earned a place in professional investors’ portfolios and if Bitcoin, Ether, and other digital assets can be seen as a new emerging asset class.

2020 saw some of the world's most influential investors publicly support digital currencies as an asset class

In the early stages of 2021, cryptocurrencies have already made a buzz. The total digital assets market value (calculated by market capitalization) has hit a record of over $1 trillion for the first time ever. The majority of this increase can be attributed to Bitcoin, representing around 70% of the total market cap. However, other assets have begun to show significant gains as well. Ether (ETH), the second-largest digital asset, made it in the world’s top 100 assets by market capitalization. And other cryptocurrencies became increasingly appealing for traders and investors looking for large returns.

While the increase in 2020 and the beginning of 2021 might be compared to the 2017 hype of Bitcoin - the ICO craze and retail FOMO - that growth was often by unsophisticated investors looking to make quick gains driving the digital assets market upwards. However, this time it seems different as institutional investors are the driving force. Over the course of 2020, large corporations and investment companies already began to embrace Bitcoin into their portfolio. Mainstream entities began unveiling their Bitcoin purchases, often allocating hundreds of millions to the digital asset which elevated the perception of cryptocurrencies as a viable investment among institutional investors. BTC’s upwards movement was fueled by institutional analyses pointing to price targets such as $146k by JPMorgan and $400k by Guggenheim.

Institutional investments and big investors for Bitcoin in 2020

Source: CoinDesk Quarterly Review 2020 Q4, 2021

MicroStrategy was the first publicly listed company to hold Bitcoin as part of its treasury strategy, quickly followed by other companies such as Square ($50 million), Ruffer Investment ($744 million), and insurance firm MassMutual purchasing $100 million in Bitcoin in December 2020. A recent survey by Bitwise Asset Management, a leading investment manager in the digital assets space, found that 17% of advisors who do not currently allocate to crypto said they will either definitely or probably start an allocation in 2021, up from just 7% in 2020. This confirms market sentiment which sees slow participation from other big institutions, such as pension funds and endowments. The hedge fund SkyBridge Capital is one of the most recent (public) Bitcoin converts purchasing over $175 million worth of the asset in December, when it had already invested over $310 million in funds investing in Bitcoin before. One of the main reasons for this fund allocating more to the digital asset was its performance which “made it prudent now to allocate a small portion of one’s portfolio to digital assets”.

Performance of BTC, ETH and macro assets in 2020

Source: CoinDesk Quarterly Review 2020 Q4, 2021

Bitcoin and Ether both outperformed other assets in 2020 by far. BTC had a return of over 300% while Ether’s annual return provided over 450%.

Performance is one of the main reasons to invest in digital assets. Other motivations include low correlation to other assets, as well as inflation hedging, especially in times of government’s money printing and stimulus packages because of Covid-19.

Survey: What is attractive about adding crypto exposure to client portfolios?

Source: Bitwise, The Bitwise/ETF Trends 2021 Benchmark Survey of Financial Advisor Attitudes Toward Cryptoassets, 2021

It’s increasingly easy to get exposure to digital assets

The accelerating rhythm of large institutional investors publicly talking about and investing in BTC as a portfolio asset not only provided validation to its role in portfolios, it has also attracted the attention of other investors. This self-reinforcing loop is likely to continue into 2021, especially given the mounting uncertainty around currencies and inflation.

Another metric that hints at growing institutional involvement is the number of whales (=wallets that hold large balances of a digital asset) formed in the past months. The figure of wallets with over 1000 BTC is over 30% higher than at the end of 2017, the height of the last crypto bull run, indicating the growing presence of deeper pockets in the market. Another indicator that institutional investors gain increased exposure to digital assets is the growing volumes figure on the Chicago Mercantile Exchange (CME), the world’s largest derivatives exchange focused on institutional investors. The CME’s BTC futures open interest in USD grew almost 300% over Q4 2020 to become the largest in the industry, having started the quarter in fifth position. CME has taken the prime spot on the list of the biggest bitcoin futures trading platforms. With its coming ETH futures product, institutional participation in the digital assets market will see continued rise.

And there are more and more ways of investors to access investments of Bitcoin, Ether, and other digital currencies. Many institutional investors are using investment vehicles like Grayscale’s Bitcoin Trust. Data from Grayscale shows on January 15 the firm had a record $27.1 billion under management - starting 2020 with just $2 billion. In Q4 2020, the company alone raised $3.3 billion across its cryptocurrency investment vehicles. Canada’s first public Bitcoin fund listed on a major stock exchange, 3iQ’s Bitcoin Fund (QBTC), hit $1 billion. And Bitwise Asset Management reached a major milestone in Q4 2020 as inflows into its products surged to new record highs, underscoring heightened institutional demand for digital assets. The firm’s assets under management  (AuM) surpassed $500 million.

And there are signs of more institutional products coming on the market soon:

  • Swiss crypto investment manager FiCAS AG received regulatory approval to make its cryptocurrency exchange-traded product (ETP) available across the European market, reaching investors outside of the Swiss market
  • Hong Kong’s first Bitcoin ETF might see the light soon as the SEC gave its ok
  • CoinShares will launch a Bitcoin ETP on SIX Swiss Exchange

We can see that regulated digital assets vehicles gain increasing popularity among institutional investors. According to CryptoCompare, AuM of crypto exchange-traded products (ETPs) capital has flooded into investment products, with the value of assets invested into ETPs growing by more than 90% in the last 30 days. There is almost $36 billion now invested in crypto ETPs.

Aggregate monthly crypto ETP product volume

Source: CryptoCompare, 2021

Most investment products are made for the two biggest digital assets, BTC and ETH. But there are some signs for other digital assets to get a piece of the pie. Grayscale could be set to launch a raft of new products including a Chainlink Trust, however, this is yet to be confirmed.

In addition to institutional investors continuing to push the market forward we can identify a surge of retail demand as well. With the launch of PayPal’s crypto offers at the end of 2020, allowing its clients to buy, sell, and hold cryptocurrencies, and a "pay with crypto at checkout" feature for over 26 million merchants launching sometime in 2021, exposure to digital assets for retail investors is getting increasingly easy. During the last weeks, PayPal already has doubled its previous cryptocurrency volume record, with $242 million worth of digital assets changing hands on the platform on January 11th. These numbers appear to show the growing popularity among retail investors, and PayPal is joining a number of FinTech brokers and wealth management platforms that have integrated digital assets or are looking to cryptocurrencies as a customer acquisition tool and revenue growth opportunity.

Digital assets as an alternative asset class

2021 will be a year where we see lots of investments in the digital assets space - be it from institutional or retail investors. While the most recent volatile BTC price movements could be retail-driven, as many small investors panic, take their profit, and walk away, institutional investors can likely drive prices and money in the market to never-reached heights. For these entities, “small” gains as for retail investors, do not play a big role. They are in it for the long-term, and the more regulated products the market gets, the more interesting it becomes for these large asset owners to invest in digital assets. The $1 trillion milestone strengthens cryptocurrencies as an investable asset class that no longer sits on the fringes of traditional finance as a toy for retail investors. In a Fidelity survey of almost 800 institutional investors across the US and Europe, 36% of respondents said they are invested in digital assets, and 60% believe digital assets have a place in their investment portfolio. 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.

But what type of assets will lose for digital assets to gain investments? The most obvious option would be that digital assets will be part of the alternatives asset class. Interestingly, equities overtook cash as the next most popular option after alternatives, with the percentage of advisors turning to their equity investments to fund a crypto allocation, due to Bitwise Asset Management.

Survey: From where would you fund an allocation to crypto in client portfolios?

Source: Bitwise, The Bitwise/ETF Trends 2021 Benchmark Survey of Financial Advisor Attitudes Toward Cryptoassets, 2021

And even commodities may see less allocation, as massive investor outflows from gold were recorded lately. As Bitcoin is often seen as a popular inflation hedge, and called the “digital gold”, commodities might be doomed to receive less investment in the coming years. This is already the case with Russian investors, emerging as one of the major countries investing in crypto. According to a report by the World Gold Council, cryptocurrency is the fifth-most popular investment tool in Russia after savings accounts, foreign currencies, real estate and life insurance. All these indicators point to digital assets’ rising status as a legitimate asset class.

Conclusion

Digital assets are clearly gaining popularity. Famous support and increasing number of vehicles to invest are paving the way for large asset owners to include cryptocurrencies in their portfolios. Although this might only be the beginning, we can see a vast inflow in this emerging asset class already. Advisors are clearly considering the space, building their understanding, and increasingly finding ways to serve their clients’ interests and activity in this new asset class. In times of retail de-leveraging, institutional investors are buying - with very long-term time horizons these players see pullbacks as a time to add to their positions. However, there are still some barriers hindering institutional adoption of crypto. These investors want to see some kind of continuity in the numbers and that the sources of liquidity are reliable in terms of the exchanges where they’re trading. Volatility of an asset class matters in terms of portfolio risk management. Further, digital assets regulatory uncertainty plays a major role. The more regulated the space gets, with regulated investment products, the more likely it is for institutions to invest.

We are still at the beginning of institutional adoption: “We think we are relatively early to this, at the foothills of a long trend of institutional adoption and financialization of bitcoin.” Ruffer Investment Company.


Sources:

JPMorgan says bitcoin could rise to $146,000 long term as it competes with gold - CNBC ; Jan 5, 2021 [1]

Growing Number of Institutional Investors Believe That Digital Assets Should Be a Part of Their Investment Portfolios - Fidelity ; Sep 6, 2020 [2]

New institutional player — MassMutual purchases $100M Bitcoin - Cointelegraph ; Dec 10, 2020 [3]

Grayscale Raises $700M+ in a Day, Its Largest Daily Asset Raise Ever - Coindesk ; Jan 17, 2021 [4]

UK fund manager Ruffer: we are in the “foothills” of institutional adoption of bitcoin - TheBlockCrypto ; Jan 18, 2021 [5]

Canada’s first public Bitcoin fund hits $1 billion - Cointelegraph ; Jan 15, 2021 [6]

Is Grayscale about to unveil a LINK Trust? - Cointelegraph ; Jan 22, 2021 [7]

Crypto ETP capitalization up 90% this month as institutional volume triples - Cointelegraph ; Jan 22, 2021 [8]

Bitwise AUM surpasses $500 million as institutions flock to crypto - Cointelegraph ; Jan 4, 2021 [9]

$1 Trillion of Cryptocurrencies Shows Booming ‘Asset Class’ - Coindesk ; Jan 7, 2021 [10]

CME Becomes Biggest Bitcoin Futures Exchange as Institutional Interest Rises - Coindesk ; Jan 7, 2021 [11]

Pension Funds Getting Set to Board Bitcoin Bandwagon, Say Insiders - Cryptonews ; Jan 8, 2021 [12]

Regulatory Green Light for Hong Kong’s First Bitcoin ETF - Cryptonews ; Jan 14, 2021 [13]