Institutional Investors Take a Long-Term View on Digital Assets

AT A GLANCE

• Institutional investors increased allocations during the crypto winter, with many using this as an opportunity to onboard crypto to learn and build for the future.
• Investors’ top motivation for investing in crypto is improved performance, with many citing their desire to allocate to innovative technology.
• Despite heightened uncertainty, digital assets were seen as offering one of the most attractive opportunities to generate alpha.
• Institutional investors cited regulatory compliance as a top criterion for selecting a crypto partner and viewed regulatory clarity as an important catalyst for future growth.

Institutional Investor conducted a survey among a representative sample of institutional investors who are invested in digital assets or plan to invest in the next 12 months to understand how they are navigating the crypto winter and how they respond to periods of stress in the market¹.The survey covered 140 investors representing $2.6 trillion in assets under management and was conducted between September 21 and October 27. The study was conducted independently by Institutional Investor. Coinbase was not involved in sourcing the respondents, and the respondents may or may not be Coinbase clients.

Results provide valuable learnings on investor needs and evolving views of the asset class. The study validates that investors are taking a long-term perspective in allocating to digital assets, and offers insights on how they are likely to adjust short-term risk-return expectations given recent events. Findings from this survey provide good context to help move the conversation forward on what needs to happen next in the industry.

Here are key themes revealed by the survey:

• Investors believe that crypto is here to stay and are taking a long-term view. Institutional adoption is now firmly entrenched with 72% of institutional investors acknowledging that digital assets are here to stay. While the majority of investors (83%) expect crypto prices to remain range bound or trend lower in the next 12 months, 71% see asset valuations increasing over the long term.

  Question: To what extent do you agree or disagree with the statement: Crypto valuations will increase over the long term.

  

  ^{Source: Institutional Investor 2022 Digital Assets Outlook Survey}

• Investors have continued to add to their crypto allocation despite the crypto winter and plan to add more in the next three years. Survey findings show continued growth and interest among investors. Sixty two percent of investors who have crypto exposure increased their positions in the last 12 months and 58% expect to increase their allocations over the next three years.
• Investors are using the crypto winter to learn and build infrastructure for the long-term. When asked for specific activities that they are doing or plan to focus on, 44% of investors stated a focus on accessing research and insights, and 36% on accessing market data. One in five are deploying crypto in their investment framework or planning to do so to improve their internal infrastructure.
• Reasons for investing in the asset class are evolving. Investors pointed to the goal to improve funded status, access yield opportunities, invest in innovative technology, and potential for long-term appreciation, as main reasons for investing in the asset class. This is a departure from past studies in which having low correlation with other asset classes and being a hedge against inflation were more prominent factors².
• Despite heightened volatility, digital assets were seen as offering one of the most attractive opportunities to generate alpha. Of the different asset classes covered in the survey, 56% of investors pointed to US investment grade corporate bonds as offering the highest alpha opportunities in the next three years, followed by digital assets (35%) and real estate (35%). Within crypto strategies, investors noted crypto hedge funds as offering better alpha opportunities over venture and long-only funds.
• Institutional investors call for more regulatory clarity and regulatory-compliant partners. The clearest finding from the survey was the need for regulatory clarity – from crypto intenders and those who are actively invested in the space. It was true during the survey period (prior to the FTX bankruptcy) and is likely even more true today.

• On the top factor impacting their decision to invest: Nearly two-thirds (64%) of crypto intenders cited the need for regulatory clarity as a top consideration in their investment process.
• On how they choose crypto partners: Investors ranked regulatory compliance, security, and trust as the top three factors to consider. In light of the volatility in crypto this year, there is a larger spotlight on how firms operate differently in meeting investor needs and have made this finding more relevant than ever.
• On 3AC, Terra Luna, crypto contagion: Nearly half (47%) of investors said that these events should accelerate the timeline for much-needed regulation. More than a third (36%) said it should spur firms to adopt better risk management strategies.

The findings are a clear call to action for the industry that will impact institutional investors confidence and adoption in the years to come.

Top factors considered in selecting a crypto partner

^{Source: Institutional Investor 2022 Digital Assets Outlook Survey}

• Investors see the next industry growth catalysts in new applications, more educated investors, and more regulatory clarity. 72% of investors cited more real-world applications that have a more mainstream audience as the top catalyst for growth, followed by more knowledgeable investors (41%) and greater clarity and guidance from regulators (37%).

Results from the survey clearly indicate that investors have continued to invest and are taking a long-term perspective despite the crypto winter. They are using this environment to hone their knowledge and build the infrastructure to prepare for the future. It is also clear that views on the asset class are evolving and that there is a pressing need for regulatory clarity. Regulatory clarity is needed to accelerate innovation, to make capital deployment easier and to ensure a level playing field.

Access the full research report here.

¹ The survey was conducted by the Institutional Investor Custom Research Lab using an online survey to understand how investment decision makers of US investment institutions view digital assets. A total of 140 institutional investors in the US participated in the survey, representing assets under management of about $2.6 trillion. The audience for the study involved a representative sample of institutional investors. The survey was conducted independently by Institutional Investor and Coinbase was not involved in sourcing the respondents.

² Coinbase Institutional, 2022. Institutional Allocator Survey. Unpublished study.