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Digital Asset Outlook 2022 Preview: User adoption

Digital Asset Outlook 2022 Preview: Investor fund flows

Research reports

In the second of a series of previews of Sygnum’s Digital Asset Outlook 2022 to be published in January, we move our focus to investor fund flows. The crypto asset class stands at an inflection point where the increase in both regulatory clarity and asset class maturity have passed the threshold for institutional allocators to invest in these assets.

The institutionalisation of the crypto market started in earnest around the end of 2020, with corporate treasuries starting to allocate to Bitcoin as an inflation hedge.

Many banks and asset managers announced in 2021 that they are setting up, or planning to set up, crypto asset operations with the intention of offering cryptocurrency based products and services to their clients. More are expected to follow.

The race towards institutional-grade crypto offerings has only just begun

The operational set-up to offer institutional crypto services takes time as it involves:

  • Building new front office teams including trading, research, and investment management
  • Accommodating these new products within various middle and back-office functions, including finance and accounting, risk management and settlement
  • Educating the client facing and management staff that exercise oversight
  • Often building specialised software engineering capabilities to deal with some of the distinctive aspects of investing in cryptocurrencies

This complex challenge of setting up these operations is made even more difficult with the already-tight crypto job market that has already seen a sevenfold year-on-year increase in job postings.

Although some large institutions have been doing the groundwork in stealth mode for a while, many are not ready to deploy funds and many more have not even started to seriously evaluate the opportunity.

Crypto allocations set for significant increase across all investor types

The majority of the expected fund flows into the crypto asset market from traditional institutions are yet to occur. We expect 2022 to be a pivotal year in the transformation of crypto assets from a primarily retail product to a mainstream institutional asset class.

A partial metric for the inflows into crypto assets over the past year are those into the most prominent passive investment products tracked by CoinShares*. The Assets under Management (AuM) increased from under USD $10bn to $20bn between October and December 2021, and accelerated from USD $40bn to around USD $85bn from mid to late 2021.

Several recent surveys (Fidelity, Ernst & Young) reported that the majority of financial institutions expect to have exposure to crypto assets over the next few years, and many of those with existing exposures expect to increase their allocation. Even pension funds, under pressure from low interest rates, are looking to crypto assets. The potential for very significant future institutional inflows paints a strong medium-term bullish picture.

*Does not include all passive or actively managed funds

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