Bitcoin set to become an institutional trading market with increasing allocations to digital assets, study finds

Institutions to increase target asset allocations to crypto and digital assets longer term, study finds, despite regulatory concerns and there being no ' how-to-guide' on how to trade these assets.

Institutional investors and wealth managers have increased their allocations to digital assets in the past year with almost 40% believing their organisation’s long-term target allocation to these assets should be between 5% and 10%.

These are the findings of a study of 100 global institutional investors and wealth managers commissioned by Nickel Digital Asset Management, a London-based FCA-regulated investment manager dedicated to the digital assets space.

The study found that almost all institutions had increased their allocation to crypto and digital assets in the past year, with a quarter increasing their allocation by more than 100%. In the next year, almost all firms said they expected to increase their allocation, with just under a third indicating by more than 100%.

Nickel Digital confirmed it was in conversations with major asset managers in the US, as well as, pension funds – none of whom are clients yet – helping them navigate the digital assets space. While trading in Bitcoin is still largely retail focused, Anatoly Crachilov, founding partner and CEO at Nickel Digital, said it will become more of an institutional market.

According to the digital asset manager’s survey, conducted online in October, almost 90% of dedicated digital asset markets teams were set up by institutional investors and wealth managers in the past 12 months. Of those that don’t yet have a dedicated team, 53% expect to have one in the next 12 months.

Last week at TradeTech Europe 2021 in London, Christoph Hock, head of multi-asset trading at Union Investment, announced that it would start trading native crypto from next year. However, an audience poll at the event showed that 31% were still thinking about their firm’s digital asset readiness, while just a quarter were either planning or ‘doing,’ and 19% had done nothing.  

Yet, firms (50 institutional investors and 50 wealth managers with $108 billion collectively in AUM) surveyed by Nickel Digital Asset Management, were bullish on long-term target allocations towards crypto/digital assets, with just over a third saying it should increase by between 5% and 10%, and 26% indicating between 3% and 5%. Some firms said they were targeting allocations of more than 10%.

Nearly half of firms surveyed said they “strongly agreed” that the finite number of Bitcoins (21 million, with almost 90% of coins already in circulation) made it an attractive hedge against inflation while 43% said they slightly agreed and 12% said they disagreed.

Michael Hall, founding partner and CIO at Nickel Digital, was bullish about the prospects for the DeFi – or decentralised finance – space, which had already seen 10 times growth, he said, with $113 billion worth of contracts built on DeFi lending and trading protocols. “DeFi is really going to change the world,” he said. “We think it is the future of finance, but there are regulatory concerns. [Currently] there is no sensible regulation for DeFi.”

Trading and investing in crypto and digital assets presents significant challenges for the financial services industry. Almost 80% of firms surveyed by Nickel Digital in October highlighted security of assets as being one of their top three concerns. Approximately 70% cited volatility, 56% said market cap was a barrier and 49% were concerned about the regulatory environment.

Nickel Digital also highlighted the challenges entailed in setting up a trading desk for crypto and digital assets, which unlike equities, are traded 24/7 across multiple exchanges. Trading systems needs to perform 24/7 and risk management system have to control risk exposures across multiple exchanges.

Hall said there are no off-the-shelf portfolio management systems that you can buy for trading crypto/digital assets. Another challenge he said is custody. “There’s no how-to-guide on how to do all of this yet,” he explained.