For the current year 2024, most experts foresaw a favorable situation for institutional investments in cryptocurrencies. According to them, institutional interest should be stimulated by the following factors and events:

• The approval of spot ETFs on cryptocurrencies;
• The easing of U.S. monetary policy (Fed rate cuts);
• Greater regulatory certainty;
• The halving of bitcoin and the market’s transition into an extended bull market.

Institutional acceptance is one of the most important signs of market sustainability. The inclusion of cryptocurrencies in the portfolios of institutional investors speaks to the health of the sector and predicts its stable development. 

Let’s take a look at whether the predictions for institutional investment in crypto are coming true, what the role of institutionalization is in the cryptocurrency industry today, and what the future of institutional investment in cryptocurrencies is expected by analysts.

Situation in 2024

Exchange analysts have noted some growth in the trend toward institutional adoption as early as the fall of 2023 in anticipation of news of a positive resolution to the cryptocurrency ETF issue. For a decade, the SEC has withheld approval for the launch of this exchange-traded product, citing risks of manipulation, questionable use, and insufficient investor protections. And now, starting January 11, 2024, the agency has approved ETFs on BTC, ETH and trading options on ETFs based on the spot price of bitcoin (options on Ethereum ETF are still in the approval stage).

The first quarter results showed interesting results that exceeded the optimistic but cautious forecasts of analysts on the institutional adoption of cryptocurrencies. Let’s see what they say about it in another study Annual Global Crypto Hedge Fund Report 2024, conducted by the consulting firm PwC together with the Alternative Investment Management Association (AIMA):

• Nearly half (!) of hedge funds invested in cryptocurrencies in the first half of the year — according to the report, 47% of investment funds invested in digital assets in 2024. This compares to 37% in 2022 and 29% in 2023. 
• 67% of investment funds that have already interacted with cryptocurrencies this year plan to maintain their capital stakes in digital assets until the end of 2024, while 33% intend to increase their open positions.
• There is also a positive trend in derivatives trading — 58% of funds are using futures trading instruments (compared to 38% last year). At the same time, spot trading is declining, with 25% of funds using it, compared to 69% last year.
• There is also increased institutional interest in the tokenization of real world assets (RWA): 33% of respondents have either already invested in tokenized assets or are in the deep learning phase. Last year, the share of hedge funds showing interest in RWAs did not exceed 25%.

Analysts attribute the emerging trend of steadily increasing confidence to the following factors:

• The positive impact of cryptocurrency ETFs on institutional investment (traditional ETFs are perceived by institutional investors as a more familiar and risk-protected way to invest);
• The impact of macroeconomic factors on institutional investing (such as central bank rate cuts in the U.S. and globally, and positive moves toward clearer regulation);
• The use of more advanced crypto asset management strategies (in addition to the usual spot trading instruments, institutional investors have increased their use of more sophisticated cryptocurrency derivatives transactions).  

The market is also seeing increased demand from mutual fund clients (family offices and individuals with ultra-high net worth). 

43% of traditional investment funds are seeing increased interest from their clients. According to a report by The Bank of New York Mellon, cryptocurrencies account for more than 5% of the investment portfolios of family offices managing the assets of their wealthiest clients. Researchers note that just a few years ago, such numbers would have looked fantastic. 

About 40% of family offices are actively investing in cryptocurrencies and are ready to continue, about 30% are at the stage of studying this issue, and the remaining third does not interact with cryptocurrencies and has no plans yet. The pessimism of the third category is mostly related to potential cyber threats, geopolitical and regulatory risks. Optimism in the first category is driven by new investment trends and opportunities, as well as interest from clients and the younger generation of family offices.

In general, experts attribute the increase in investor optimism to increased regulatory certainty (the importance of the adoption of MiCA regulations in EU countries is noted), improvements in DeFi infrastructure and blockchain-based tokenization mechanisms, as well as the launch of new exchange-traded products such as ETFs on crypto assets and their derivatives. 

What cryptocurrencies are institutional funds investing in?

Institutional investment strategies in cryptocurrencies are based on a deep and comprehensive analysis of macroeconomic factors, the situation in the sector and each individual digital asset considered as an investment object, taking into account forecasts of all possible risks. Institutional investors first choose the most reliable assets. 

According to the EY (Ernst & Young) report, institutional investments in bitcoin and ethereum take the lion’s share of investment funds’ crypto portfolios: 98% invested in BTC and 75% in ETH. Solana (SOL) follows with 24% and Ripple (XRP) with 18%. 

Against the backdrop of maintaining positions in major cryptocurrencies, there is also a trend of institutional investment in new cryptocurrencies in 2024. These are mainly tokenized assets such as securities, stocks and bonds.

Bitcoin 

Despite the tensions of the second quarter, the overall decline in the crypto market and the 12.7% correction in bitcoin, institutional interest has remained high. This is a good indicator to assess the long-term prospects of the first cryptocurrency. 

According to the quarterly 13F reports (filed with the SEC by institutional investors with more than $100 million under management), the number of funds participating in spot ETFs grew by 28% to 1,199 companies. As a result, their share of total inflows surpassed 20%.

The crypto community also noted the appearance of such significant participants as Goldman Sachs and Morgan Stanley, which invested a total of $600 million. It is believed that this is just the beginning, as such a modest participation was dictated by the complexity of vetting the giants of the financial market for admission to new exchange-traded instruments.

Increased interest was also noted on the part of pension funds, which, due to legislative obstacles, are not allowed to invest directly in BTCs and therefore buy shares of companies that give them indirect ownership. For example, Norway’s state pension fund indirectly owns 2446 bitcoins through NBIM (Norges Bank Investment Management), which when distributed to each citizen means a certain amount in fiat. Or South Korea’s pension fund owns shares in Coinbase and MicroStrategy (both companies have significant BTC capital on their balance sheets).

Ethereum

Institutional investors invest in Ethereum as a stable and constantly evolving platform that dominates decentralized finance. Institutional money into DeFi is primarily entering through ETH due to its high liquidity and wide range of attributes, including leading stablecoins, tokenization mechanisms and other multiple financial instruments. According to a recent report by Blockworks Research, nearly 70% of institutional investors are actively using the staking tools offered by the ecosystem and believe in the long-term investment potential of the world’s second most important blockchain platform. 

Some interesting recent news from around the world that correlates with the positive predictions for the crypto market in 2024 in terms of institutional participation inсlude the following:

• In the UK, the first ever direct purchase of BTC (without participation in ETFs) was made by a pension fund, the name of which has not yet been officially disclosed. 3% (!) of total AUM (assets under management) was allocated to investments in the first cryptocurrency after a lengthy E&S consultation. By comparison, the Wisconsin Investment Council has so far only decided to invest 0.1% of its AUM in BTC-ETH.
• Ethereum is not lagging behind either — the Michigan State Pension Fund is following the general trend, having published information on the purchase of more than $11 million worth of ETF-ETH shares. Eric Balchunas, an analyst at Bloomberg, called the decision of the US state authorities “a big win for Ethereum”. 

Benefits and opportunities for institutional investment in cryptocurrencies

• The emergence of instruments such as ETFs on digital assets and their derivatives is stimulating institutional investment by increasing the liquidity of the cryptocurrency market. New ETFs allow investors to diversify their portfolios with new assets to which they previously had no legitimate and safe access. 
• The low correlation to traditional assets and high volatility of cryptocurrencies make them a unique addition to institutional investments: with proper portfolio customization, the overall risk-return ratio is significantly improved. The high returns of leading cryptocurrencies significantly improve the overall performance of portfolios in the face of the high volatility of traditional assets and the economic uncertainty of recent years.
• Interaction with innovative investment products. The high-tech blockchain industry, recognizing the importance of institutional funds’ influence on the cryptocurrency market, offers institutional investors the most advanced specialized solutions: crypto derivatives, institutional investment tools, analytics, reporting and many others.

Barriers for institutional investment in cryptocurrencies

The main challenge is the regulatory shortcomings of institutional investment in cryptocurrencies:

• Difficulties for funds to adapt and comply with current legislation, which is not yet finalized;
• Prohibition of direct investment by funds in cryptocurrencies in many jurisdictions.

Risks of institutional investment in cryptocurrencies also inсlude security issues for a new type of asset: threats of hacking and hacking attacks must be considered, as well as custody conditions for effective management and protection of investments.

Conclusion

Institutional investment and its role in the adoption of cryptocurrencies is an important issue for the crypto industry. We see that positive predictions for 2024 are coming true, and according to surveys, most institutional investors believe in the long-term value of blockchain and cryptocurrencies. 

Going forward, if the MiCA rules are successfully implemented in the EU and the newly elected US President fulfills his promises of full favorable treatment for the cryptosphere, we will continue to see only positive trends in institutional investment. 

Thank you for your attention. Invest profitably and risk-free!

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