The study suggests changing perceptions of cryptocurrencies among institutional investors and wealth managers, with more regarding the sector favourably.
Almost half of institutional investors and wealth managers polled recently regard cryptocurrencies more positively since the coronavirus crisis erupted, according to London-based digital hedge fund manager Nickel Digital Asset Management.
Its survey of institutional investors and wealth managers, who collectively manage around $108.4 billion, showed that 43 per cent regard cryptocurrencies more favourably, while 35 per cent said that their views had warmed slightly. A key concern for investors, above volatility and regulation, is security, with 79 per cent saying asset custody as being the key consideration over whether to invest in this space. Custodians offer safekeeping solutions for investors in order to minimise risk.
The report involved interviews with 50 wealth managers and 50 institutional investors across the US, the UK, Germany, France and the United Arab Emirates.
When asked to pick their three main reasons for developing a more positive view of cryptocurrencies since the pandemic started, 58 per cent of professional investors cited strong capital growth, followed by 53 per cent who said it is because many crypto and digital assets have shown attractive diversification benefits when compared with mainstream asset classes.
“Many cryptocurrencies have performed well since the coronavirus crisis started. From 1st January 2020, the value of bitcoin and Ethereum has increased by 460 per cent and 1812 per cent respectively,” Fiona King, head of institutional sales, Nickel Digital, said. “The crypto and digital markets have also matured a great deal, providing greater custodial services and liquidity for example. There is still much more to be done – especially in regulation – but the market will continue to evolve and grow, and as this happens long-term perceptions of crypto and digital assets will improve even further, and professional investors will increase their allocation to them.”
Some 47 per cent of respondents cited improving custodial services in their three main reasons for having a more positive view of crypto currencies, and 41 per cent said growth in market capitalisation and its positive impact on liquidity were among their top three reasons.
According to the research, 78 per cent of investors now have a positive or constructive view of bitcoin, with only 9 per cent saying their perception of the cryptocurrency is negative. The corresponding figures for Ethereum are 77 per cent and 7 per cent respectively.
While the crypto boom is creating huge wealth for financial intermediaries, crypto assets remain relatively volatile and regulators around the world continue to keep a wary eye on it, although some are more liberal than others. Just this week, the Monetary Authority of Singapore announced rules designed to clamp down on retail investors' use of cryptocurrencies, while the UK government said this week that it is due to introduce legislation to regulate the advertising of crypto assets to prevent mis-selling.
Cryptocurrencies, aka digital assets, have become more "mainstream" in recent years. Several firms such as Goldman Sachs, BNY Mellon, Julius Baer and Guggenheim Partners, among others, are coming on board. Last year, SC Ventures, Standard Chartered’s innovation and ventures unit, partnered with Northern Trust to launch Zodia, a cryptocurrency custodian for institutional investors, which was registered with the FCA.
Nickel Digital, which is London-based and regulated by the FCA, told this publication last year that when managed in a controlled manner, exposure to bitcoin can add valuable returns to a portfolio, see here for that interview.
The firm aims to provide a gateway for traditional investors into the digital assets market across a broad range of risk profiles and says risk management is the core of its approach to investment management. It uses algorithmic trading, pursuing a range of arbitrage strategies in spot and derivative markets, as well as directional solutions, aiming to capture structural expansion of the digital assets market.
Founded by three people in June 2019, Nickel Digital now has a team of 20 staff, with senior management coming from Goldman, JP Morgan, Bankers Trust, Morgan Stanley, Rothchild, Bank of America, UBS and a few major hedge funds.
It offers four funds in the digital asset space, including its Digital Asset Arbitrage absolute return fund, Diversified Alpha (Digital Factors) non-directional multi-strategy fund, DeFi Liquid Venture fund capturing the broader digital assets space outside bitcoin, and its Digital Gold Institutional fund, a bitcoin tracker. The fund has delivered strong risk-adjusted returns since inception in 2019, with volatility of 3.5 per cent and a Sharpe ratio of 3.4, according to the company.