(Kitco News) – Institutional adoption has long been a goal of cryptocurrency proponents as acceptance into mainstream finance would bring a new level of legitimacy to the asset class and theoretically propel prices higher.
The January launch of multiple spot Bitcoin (BTC) exchange-traded funds (ETFs) was a historical event for the sector and put it on a path to wider adoption, but a survey conducted by the Digital Assets Council of Financial Professionals (DCAFP) in December indicates that crypto adoption was on the uptrend even before the ETFs launched.
The survey, which was conducted in collaboration with Franklin Templeton Digital Assets, found that out of the 166 financial professionals who answered the survey questions, including 78 financial advisors responsible for managing client portfolios, 59% said they actively recommended crypto to clients.
Of those, more than 7% are recommending crypto to everyone, while another 29% of advisors have recommended crypto to more than half of their clients. Roughly a quarter of respondents (26%) said they have recommended crypto to fewer than 10% of clients.
“Overall, two-thirds of advisors (81%) are recommending that clients allocate 1% to 5% of their assets to crypto,” a report from the DCAFP said. “Another 19% recommend allocations of 10% to 15%. No advisors recommend allocations of 4%, in the 6% to 9% range, or more than 15%.”
When it comes to crypto already held by clients, 83% of the financial advisors who reported asking clients about their holdings found that 10% to 49% of their clients invest in crypto, and less than 7% said none of their clients do so.
41% of financial advisors who were not actively recommending crypto to their clients at the time of the survey said they plan to do so, and of those, 57% said they plan to in 2024, with 14% planning to allocate to crypto within three months.
Of the financial advisors who have not yet allocated to crypto but said they plan to do so, 43% say they plan to allocate 2% of clients assets to the asset class, while another 28% of advisors, split equally, plan to allocate either 1% or 3% of client assets.
Whether it's because of the recommendation of their financial advisors or the headline news coverage of Bitcoin’s price rise over the past six months, retail investors have been instrumental in driving the rally to a new all-time high as institutions are just starting to wade deeper into the crypto waters.
"The price action ... has still been driven by retail primarily,” said Mathew McDermot, head of digital assets at Goldman Sachs, while speaking at the Digital Asset Summit (DAS) conference in London. “But it's the institutions that we’ve started to see come in. You really see now the appetite is transformed.”
“Last year was tough, but just coming through to this year we've seen a big sea-change not only in terms of the types of clients but also in terms of volumes," he added.
McDermot said the launch of spot BTC ETFs prompted a “psychological shift” in how investors view the crypto market and could usher in an era of tokenization.
"I do think over time we’ll start to see more asset classes get tokenized and actually get some scale – but maybe that’s one or two years down the line," McDermott said.
In a separate interview with The Banker, McDermott said the SEC’s decision to allow spot BTC ETFs was “quite a seminal moment for the market just because of the size of the US market.”
“The foundational layers have been laid over many years,” he said. “Now that we’ve got significantly more regulatory clarity across the globe, you can’t underestimate how important that is, particularly for organizations that want to invest in this space and build out their digital asset strategies and team.”
The approval has also led to a “growing number of institutional clients looking to onboard and be in a position to trade,” he added. But even before the ETFs launched, McDermott noted that the CME Group’s derivatives marketplace saw a “massive uptick in volumes over the past 12 months,” and now “has the largest amount of open interest, which is now above any of the unregulated exchanges — that has been a big shift.”
Offering Bitcoin in ETF form made it more accessible to the masses and removed the diffculty of storing and transacting with cryptocurrencies from the equation, he said. “It is now a product they can [interact] with and there’s obviously enhanced investment protection. It’s creating a more user-friendly product that has all the institutional trappings, and I think that’s hugely positive.”
To better serve clients interested in digital assets, McDermott said Goldman Sachs is currently focused on developing proofs of concepts around tokenization and broadening the use of blockchain technology inside the bank
“Again, it comes back to, ‘Is the technology solving a real-world problem or is it just some kind of intellectual fascination?’” he said. McDermott predicts a “tokenization continuum” will start to emerge where the more mundane financial products, such as Treasuries and currencies (stablecoins), will be tokenized first, allowing investors to “get comfortable” with the concept and enabling them to scale.
Once “real commercial value” is achieved through scale, tokenization will move to more “esoteric” markets, such as real estate private equity, he said
“We’re involved in specific projects in this space, which probably have taken several months longer than we should because I want to ensure that whatever we do is scalable,” McDermott said. “Not only the proof of concept has to be scalable, we’ve looked at that full lifecycle to ensure economic efficiencies across the lifecycle to make it a seamless investment opportunity for those looking to invest.”
As for why he sees promise in blockchain technology, McDermott said “There is such a compelling opportunity there to de-risk the market, create efficiencies by reducing settlement and operational risks, be more proficient with the use of liquidity and capital — costs of which continue to rise — and just that seamless nature, to be able to move around the system in a very transparent way.”
“Crypto is fascinating and there are some really interesting opportunities, but there is a powerful kind of opportunity with the underlying technology as well,” he concluded.
