According to OKX’s research, there are four crucial focus areas for institutions considering entry into the digital asset market: asset allocation, custody, regulation, and risk management. Liquidity, market integration and compliance are also underlined as important factors for market entry.
The focus areas and insights that emerged in the research brief were gathered from an Economist Impact roundtable discussion in Dubai in the second quarter of 2024 featuring senior business leaders in digital assets and finance, as well as desk research and interviews of representatives of prominent financial services and investment companies, 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. Average allocations currently average between 1% to 5% based on risk appetites, and this is expected to increase to 7.2% by 2027.
Institutional investors plan to ramp up portfolio allocations to crypto through a number of investment strategies, with approximately 51% of investors considering spot crypto allocations, 33% considering staking of digital assets and 32% considering crypto derivatives. 69% of institutional investors anticipated increasing their allocations to digital assets and/or related products by 2026/2027.
The institutional digital asset custody market is experiencing rapid growth and is projected to have a compound annual growth rate of over 23% through 2028. 80% of traditional and crypto hedge funds that invest in digital assets use a third-party digital asset custodian.
There is a growing trend toward harmonising local and regional regulatory frameworks, such as the MiCA cross-jurisdictional framework in Europe, which is paving the way for global adoption of digital assets. Exchanges have recognised the importance of adapting to local regulatory requirements to balance growth with market integrity. A significant focus area is stablecoin regulation, with tier-1 markets establishing regulatory 'sandbox' environments to explore and refine rules.
Effective risk management is essential for integrating digital assets into institutional portfolios. Exchanges, custodians, and custody insurers should focus on strengthening infrastructure and security. The adoption of new technologies, like proof-of-reserves and independent third-party audits, can enhance institutional confidence and adoption. Risk management strategies from traditional finance, such as value-at-risk models, scenario analysis, stress testing, and reverse stress testing, should be adapted to protect institutional investments in digital assets.
Officials from OKX commented that this initiative to engage with the world's big institutional investors demonstrates how digital assets are rapidly being adopted in investment portfolios. 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.
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