Investing In Cryptocurrency: Are institutional investors ready for crypto?
Investing In Cryptocurrency: Are institutional investors ready for crypto?
Donald Trump's re-election and his openly pro-crypto stance have boosted the confidence of many investors in cryptocurrencies. That confidence was already growing following the introduction of Bitcoin ETFs and the involvement of some major financial institutions in them. Is the time ripe for institutional investors to do more with crypto?
By Esther Waal
Following Trump's election victory, Bitcoin's share price rose significantly, peaking at over $107,000 in December 2024. This rise is attributed in part to Trump's pledge to make the United States the ‘crypto capital of the world’ and his announcement to strategically hold Bitcoin as a national reserve and support Bitcoin mining activities in the US.
Many investors see confidence in Bitcoin strengthened as a result. But even before Trump's re-election, crypto's popularity increased. A major reason for this was the US Securities and Exchange Commission's (SEC) approval of the first Bitcoin ETF. In particular, crypto products from BlackRock and Fidelity led to a surge in institutional investment in the crypto market.
Yet institutional investors are still left with many questions. Reason enough for Financial Investigator to put some of these questions to some experts with different backgrounds. After all, how is the intrinsic value of cryptocurrencies determined? To what extent does crypto currency correlate with traditional asset classes? Which cryptocurrencies are currently most accessible to institutional investors? To what extent does investing in cryptocurrencies align with ESG objectives?
What is also important, of course, is how the cryptocurrency market will develop in the coming years. And given the recent sharp increase in confidence in crypto, the question is also what most stops institutional investors from investing in crypto currencies. Indeed, as an institutional investor, can you afford not to invest in cryptocurrency?
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Mathijs Kriek Portfolio Manager, TreeCap
To what extent does cryptocurrency correlate with traditional asset classes? Cryptocurrencies and other digital assets have historically shown very low and, in some cases, even negative correlations with traditional asset classes. This means they can offer an important source of idiosyncratic risk and thus generate smart alpha in diversified investment portfolios. Of course, it remains a dynamic relationship based on market conditions (macro and sentiment) and external factors (think laws and regulations, and technological advances in blockchain).' How will the crypto market develop in the coming years? 'I expect Distributed Ledger Technology (DLT) and its underlying digital assets to play a crucial role in the future, especially in areas such as finance (think settlements, collateral management and corporate actions), the tokenisation of various assets, the integration of blockchain into physical infrastructure and even in the development of a renewed internet (web3.0). In addition, I believe AI could function better with the help of blockchain technology. I see two key factors for wider adoption. First, I think clear regulation, with the EU leading the way with MiCAR, could pave the way for entry and participation in digital assets by institutional investors. Second, I expect that cash-on-chain capabilities, such as (regulated) stablecoins or other solutions linked to the traditional payment system, should be further developed and improved. I believe blockchain is changing the way data and value are exchanged and stored, which will lead to greater trust, efficiency and security.' |
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Menno Martens Crypto Product Manager, VanEck
How will the crypto market develop in the coming years? We expect the crypto currency market to grow significantly as trends such as tokenised real-world assets, DeFi and DePIN disrupt traditional businesses as more efficient, transparent and future-proof solutions. While the market is currently largely dominated by speculation, only real adoption can show winners, and this still involves eliminating trusted intermediaries. We foresee crypto becoming an integral part of the technology stack of tomorrow's society.' What most prevents institutional investors from investing in cryptocurrencies? 'Institutional investors usually struggle with regulatory and ESG concerns, as it is widely believed that it makes sense from a portfolio management perspective to allocate to crypto because of its asymmetric return profile. However, these struggles are slowly but surely clearing up and paving the way for crypto as an asset class. For instance, ESG-related concerns are mainly about Bitcoin's energy consumption, but people tend to completely underestimate the importance of the social and governance aspects, for which crypto's features could be significantly beneficial. Crypto offers decentralised, transparent governance and a financial system for billions of people who are currently under-served in today's society. Regulation is moving in the right direction, as it is often seen as a double-edged sword. The crypto-natives may not favour regulation, but it will enable wider acceptance of the asset class as it becomes legitimised and recognised.' |
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Jeroen Tielman Head Institutional Relations, Theta Capital Management
To what extent does cryptocurrency correlate with traditional asset classes?
‘Blockchain-technologie introduceert een nieuwe, alternatieve manier om economische activiteiten uit te voeren waar nu een centrale tussenpartij voor nodig is. Aangezien de technologie nieuw is, zijn de eerste investeerbare assets ‘venture’-beleggingen. Wat betreft de inschatting van de correlatie kunnen we er van twee kanten naar kijken. Als venture asset bevindt het zich aan de bovenkant van het risicospectrum en kan er een hoge correlatie met andere risicovolle beleggingen worden verwacht. Voor zover de BITWISE 10 Large Cap Crypto Index als een proxy gezien kan worden voor blockchain-toepassingen, is er over de periode januari 2014 tot en met december 2020 een lage correlatie gemeten.’
As an institutional investor, can you afford not to invest in cryptocurrency? 'In our view, very much not. The appeal of the crypto market - with tokens as economic proof of ownership of specific applications - is based on the underlying blockchain technology of ‘decentralised trust’. With about a third of global GDP related to trust, a significant part of the economy has the potential to migrate to autonomous decentralised ‘on-chain’ networks, and this is apart from all the new economic applications that become possible. It is therefore important for institutional investors to form an informed opinion on the potential impact of the introduction of blockchain technology, partly by virtue of their ‘fiduciary duty’. Not only as an opportunity, but also in the form of a potential threat to the current portfolio (e.g. listed financials). It is clear that the potential impact of the technology could be very large, and in our view even larger than that of the current internet. Also, we believe that institutional investors should also look at blockchain technology because of ESG considerations.' |
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Maarten Kiewiet de Jonge Director, Duplus Fund Management
How is the intrinsic value of cryptocurrencies determined? 'Traditionally, intrinsic value is determined by cash flow, dividends or underlying assets. This almost never applies to digital assets. Digital assets can be valued through several methods, but in our view, the most meaningful method is to determine the application value. How do you determine it? In this respect, digital assets are very similar to social media. A crucial feature of both social media and digital assets is the network effect: the higher the number of users, the more application value is created. There are several valuation techniques for quantification, such as the Metcalf model, for example.' To what extent does investing in cryptocurrencies align with ESG objectives? 'In terms of the “E”, digital assets, like equities, cover the whole spectrum, from minimal energy consumption and low climate impact to sky-high energy consumption. In addition, some digital assets are specifically designed to promote sustainability. On the ‘S’ front, digital assets actually promote inclusiveness. Think of developing countries where not everyone has access to a bank account, or the efficient sending of ‘remittances’ to the home front. In terms of Governance, the philosophy of digital assets is to place control with the community as a counter-reaction to too much concentration of power. Most digital assets projects are decentralised. This means that control does not lie with a central entity. This contributes to a more democratic and fair governance structure.' |
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Maurice Mureau Chief Executive Officer, Hodl Group
How will the crypto market develop in the coming years? 'The crypto market has developed strongly recently, with the introduction of Bitcoin and Ether ETFs as major milestones and a growing acceptance of tokenisation within financial institutions. An example of this is the BUIDL Fund, a tokenised treasury fund launched in March. Tokenisation is expected to remain the dominant theme in the crypto market because of the benefits it offers in efficiency, transparency and cost reduction. Together with the wider acceptance of crypto as an investment option, we expect the crypto market to further integrate itself into the financial system and contribute to sustainable growth.' Which cryptocurrencies are currently most accessible to institutional investors? 'Many crypto projects are currently less accessible to institutional investors due to their limited market capitalisation and short track record. However, Bitcoin, Ethereum and, increasingly, Solana are attracting significant interest from this corner. Bitcoin and Ethereum in particular have an edge because of their strong focus on security and risk management. Both are tradable via ETFs on traditional exchanges and backed by incumbents such as BlackRock and Fidelity, offering institutional investors easy and secure access without the previous challenges around self-storage. Meanwhile, options are also available on Bitcoin ETFs, allowing institutional investors to hedge risk more effectively. In addition, there is growing interest in funds like our own, which are often more attractive than ETFs focused on a single asset due to broader diversification.' |
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Jeroen van der Put Independent pension fund manager, consultant, various pension funds
What most prevents institutional investors from investing in cryptocurrencies? 'It is not a long-term sustainable investment and has relatively high uncertainties. It has no intrinsic value or cash flow and has extremely high volatility. Its valuation, risk profile and contribution to the portfolio are therefore difficult to determine ex ante. Cryptocurrencies cost a lot of energy, which also has significant negative environmental impacts. It is a speculative investment that can go either way depending on the confidence placed in it. And that comes on foot and goes on horseback. The value can go down sharply because of incidents related to cybercrime, far-reaching regulation and new solutions.' Have the organisations you are involved with considered investing in cryptocurrencies? It is not seriously considered anywhere. We do systematically check whether there are categories that can add value to the portfolio. For instance, crypto also came along on occasion, but was quickly dropped, due to the test of investment beliefs and the aforementioned arguments. |
