How Institutional Investors Can Approach Digital Assets

How Institutional Investors Can Approach Digital Assets

While individual investors were early adopters of Bitcoin and other digital assets, institutional interest has grown in recent years. In fact, 58% of surveyed institutional investors said they were invested in the space in 2022—up from 36% in 2020.

In this graphic from sponsor MSCI, we explain the growing popularity, what a digital asset is, and how investors can get exposure. It is the second in a two-part series on decoding digital assets.

Growing Appeal

Institutional investors are drawn to the market for a number of reasons.

Investors are most interested in the return potential and decentralized nature of these assets. 

What Are Digital Assets?

A digital asset is something you can buy, sell, and trade online that derives its value from ownership or use rights.

These types of assets are powered by blockchain technology, a public digital database where data is stored in “blocks” that are linked together in an unchangeable “chain”. Here’s how it works.

1. A new transaction is entered, such as someone sending another person bitcoin.
2. A block representing the data is created.
3. The block is transmitted to a network of peer-to-peer computers around the world.
4. The transaction is validated.
   • Through the proof of work process, a network of computers solves a complex equation to validate the transaction. This process requires significant processing power, making it energy intensive.
   • Alternatively, through the proof of stake process, participants contribute or “stake” their own cryptocurrency in order to validate the transaction. This consumes significantly less energy than the proof of work process.
5. If approved, the new block is permanently added to the chain.

It is nearly impossible to change blocks once they have been added, because it would require consensus from 51% of the computers in the network.

Higher Trading Volume

Blockchain technology was created to enable Bitcoin, but has since grown to power thousands of assets that are digital. The proliferation of cryptocurrency and their growing acceptance has led to much higher liquidity.

Trading volume peaked at $2.2 trillion during the May 2021 crypto crash, when China banned cryptocurrency mining and ordered financial institutions not to offer cryptocurrency services. While down from the peak, average monthly trading volume in 2022 was eleven times higher than the monthly average in 2019.

Categorizing Digital Assets

Today, digital assets go far beyond cryptocurrency and can be put into four main classes.

From currencies to applications, it can be helpful for investors to understand each asset’s primary use. 

Getting Exposure

As the ecosystem expands and liquidity increases, more investors plan to have digital asset exposure.

• 81% of institutional investors believe digital assets should be part of a portfolio
• 74% plan to buy or invest in the space in the near future

To help institutional investors make portfolio decisions, MSCI has launched four indexes.

Each index is designed to help institutional investors as they look for greater transparency and insight into the market.

Tools for Transparency

Digital assets are an emerging asset class with growing interest. Institutional investors seeking to better understand the risks and explore opportunities may use MSCI’s indexes.

Navigate the market with MSCI’s Digital Assets Indexes.

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