(Kitco News) – The launch of spot Bitcoin (BTC) exchange-traded funds (ETFs) in the U.S. has succeeded in attracting more attention from registered investment advisors as a June ‘Advisor Pulse Survey’ conducted by the Digital Assets Council of Financial Professionals (DACFP) and sponsored by Franklin Templeton Digital Assets showed that four in 10 (40%) financial advisors report they have recommended crypto to at least half of their clients, up from 32% in March.
584 financial professionals participated in the survey, which showed an uptick in the number of advisors who have started recommending crypto to their clients in the wake of the ETF launches. “The number of advisors recommending crypto to all their clients nearly doubled, rising from 8% in March 2024 to 13% in June 2024,” a press release from the DACFP said.
“The availability of spot bitcoin ETPs is clearly driving increased advisor engagement with crypto,” said DACFP Founder Ric Edelman. “This data underscores the urgent need for advisors to enhance their digital asset knowledge to effectively serve their evolving client base.”
Nearly one in four (24%) advisors recommended crypto allocations of 2%, which was consistent with the March 2024 survey. “The number of advisors recommending that clients allocate between 1% to 5% of their assets to crypto remained roughly the same, increasing only one percentage point from March 2024 (87%) to June 2024 (88%),” the report noted.
While 60% of advisors said they were not recommending crypto to clients, a majority of those advisors (56%) said they plan to do so in the future. 40% said they intend to begin recommending digital assets within the next six months, up from 35% who indicated this intent in March 2024. Nearly all advisors (91%) plan to recommend that clients allocate between 1% to 5% of their assets to digital assets.
“We're excited to see that the advisor community and their clients increasingly express interest in digital assets investments,” said Sandy Kaul, Head of Digital Asset and Industry Advisory Services at Franklin Templeton. “The introduction of new products like spot crypto ETPs emphasizes the need for advisors to partner with firms capable of providing the guidance and education required to navigate the rapidly developing market.”
According to a research report commissioned by the OKX cryptocurrency exchange titled Digital assets as the new alternative for institutional investors: market dynamics, opportunities and challenges, institutional investors now see digital assets as an “inevitable institutional opportunity” and a promising asset class that is set to grow substantially.
The study, which was conducted at an Economist Impact roundtable discussion in Dubai in the second quarter of 2024, found four critical areas of focus for institutions that are considering entry into the digital asset market: asset allocation, custody, regulation, and risk management. Liquidity, market integration, and compliance are also highlighted as important factors for market entry.
Participants in the roundtable discussion included senior business leaders in digital assets and finance, as well as desk research and interviews of representatives of leading financial services and investment firms, including Citi, Al Mal Capital, Skybridge Capital, VanEck, and others.
“There is ‘growing consensus’ among institutional investors that digital assets, such as cryptocurrencies, NFTs and tokenized private funds, have an important place in portfolio asset allocations,” the report said. “Average allocations typically are currently between 1% to 5% based on risk appetites, and this is expected to increase to 7.2% by 2027.”
Institutional investors plan to increase their portfolio allocations to crypto through various investment strategies, with approximately 51% of these investors considering spot crypto allocations, 33% considering staking of digital assets, and 32% considering crypto derivatives.
This study showed even more bullishness than the one from the DACFP, with 69% of institutional investors saying they plan to increase their allocations to digital assets and/or related products in the next two to three years.
Along with rising institutional interest is the entry of more institutional-grade custodians. “[E]ffective risk mitigation through custody is resulting in ‘new opportunities’ for investors to access the digital asset markets,” the report said. “80% of traditional and crypto hedge funds that invest in digital assets use a third-party digital asset custodian.”
Due to the increased demand, the institutional digital asset custody market is experiencing rapid growth and is predicted to have a compound annual growth rate of over 23% through 2028.
“There is a positive trend of convergence of local and regional regulatory frameworks, such as the MiCA cross-jurisdictional framework in Europe, and this is creating a pathway for adoption globally,” the report said. “Exchanges have recognized the need to flexibly respond to local regulatory requirements to balance the need to grow with the need to maintain market integrity.”
The study also found that stablecoin regulation is a key area of focus for regulators as they have been pivotal in helping expand the digital asset market by providing crypto traders with a way to lock in the value of price increases while remaining digitally native.
“Risk management is a crucial step for digital assets to become allocated into institutional portfolios,” the report said, leading to exchanges, custodians, and custody insurers “prioritizing robust infrastructure and security measures.”
“The adoption of new technologies, such as proof-of-reserves, as well as independent third-party audits, can increase digital asset adoption among institutions,” the authors wrote. “Comprehensive risk management strategies utilized in the traditional financial sector, including value-at-risk models, scenario analysis and stress testing, and reverse stress testing should be adapted and used to safeguard institutional investments in cryptocurrency and digital assets.”
“This initiative to engage with the world's leading institutional investors demonstrates how digital assets are rapidly being adopted in investment portfolios,” said Lennix Lai, Chief Commercial Officer at OKX. “The trend will only intensify if we see advancements in blockchain technology, enhanced regulatory clarity, and uptake of innovative digital solutions like tokenized real-world assets.”
