Big money managers are changing their tune on crypto — and fast.
A majority of professional investors believe that digital assets will become mainstream, according to a survey conducted by London-based crypto hedge fund Nickel Digital Asset Management. More than eight out of 10 respondents in the study of 200 institutional allocators and wealth managers said they see wider-use cases for cryptocurrencies, namely for diversification benefits in their portfolios.
Half of the professional investors surveyed listed portfolio diversification as the main role they expect digital assets will play in the future. Other common broader-use cases money managers reported seeing for crypto were the tokenization of traditional assets — converting real, regulated assets into digital assets on blockchain — offering access to decentralized finance platforms, and the ability for crypto to provide a new value transfer mechanism, such as a bank transfer or a wire transfer, for example.
Just under half of professional investors said blockchain and digital asset technology is scalable and on its way to achieving mainstream adoption, and about one-in-five respondents believe crypto has the potential to transform the global economy.
“To a great extent, digital assets have already achieved ’escape velocity’ — they have achieved a multi-trillion dollar market cap, and there is gradual regulatory acceptance of them in key countries,” Nickel Digital CEO Anatoly Crachilov said in a statement. “This is clearly reflected in the overwhelming majority of professional investors who believe digital assets will be mainstream.”
Change of tone
The upbeat view on digital assets among the investment management sector comes following a string of positive headlines for cryptocurrency in recent weeks. Earlier this month, Goldman Sachs became the first major U.S. bank to execute an over-the-counter crypto transaction facilitated by the crypto financial-services firm Galaxy Digital Holdings, founded by ex-Goldman exec Michael Novogratz.
In his letter to shareholders on March 24, BlackRock CEO Larry Fink said Russia's war in Ukraine could accelerate the adoption of digital currencies by central banks — a huge change in his tone on crypto when he called bitcoin “an index of money laundering” just five years ago. BlackRock, the largest asset manager in the world, is also reportedly planning to offer cryptocurrency trading to its investor clients.
Meanwhile, Bridgewater Associates, the world’s largest hedge fund founded by billionaire investor Ray Dalio, is said to be on pace to back its first cryptocurrency fund.
The moves by major institutional investors to get more involved in the digital asset boom mark a significant change from just a few years ago when Wall Street shuddered at the idea of cryptocurrencies.
Nickel's survey found that 13% of respondents claimed it was too early to say whether digital assets will become mainstream, and a mere 3% said this will not happen. Those figures would have been much higher just a few years ago.
But as popularity and demand grows for digital assets, and investors are faced with geopolitical and economic uncertainty, many big investors are lining up to cash in on crypto.
Although some have argued that bitcoin's lockstep price action with traditional equities undermines its usefulness as a potential investment hedge, a separate report out last month from Nickel Digital that reviewed the effects of an allocation to bitcoin on diversified portfolios found investors could have generated a greater return with exposure to the token over time.
A standard investment portfolio comprised of 60% equities, based on the S&P 500’s total turn, and 40% bonds, based on the 10-year U.S. Treasury yield, would have delivered a cumulative total return of 160% with a standard deviation of 9.8% between December 31, 2012 and December 31, 2021, according to Nickel Digital.
A reallocation of just 1% of that portfolio composition to bitcoin would have boosted the return by 29% to 189% in the same period, with the same 9.8% standard deviation, the firm’s research found.
After a rout to start the year, bitcoin soared past $47,000 on Sunday, effectively erasing its losses for the year as it looks to sustain its gains this week so far. Growing institutional investors have contributed to the swing and help position the currency to again signal its potential to rival the stock market’s performance this year.
"At the moment, the price of bitcoin is supported by some positive developments, such as Goldman Sach’s first bitcoin option trade via Galaxy Digital, Cowen’s establishment of crypto division, and BlackRock’s note that pointed out the war in Ukraine could accelerate adoption of digital currencies," Yuya Hasegawa, crypto market analyst at Japan's bitbank, inc., said in a recent note. "Furthermore, with the U.S. 10-year breakeven inflation rate back at its highest, bitcoin’s breakout may be a matter of time."
Moreover, Bloomberg Intelligence commodity strategist Mike McGlone said while rising interest rates hurt risk-on equities, it remains unclear whether bitcoin and other crypto assets are susceptible to the downward pressure.
“The bottom line for bitcoin is that it's poised to outperform the Nasdaq 100 in most scenarios," McGlone wrote. "The fact that crypto is well on its way to becoming the global digital collateral in a world going that way appears to be playing out in 2022."
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc