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.
| Feature | % of Respondents |
|---|---|
| High potential upside | 43% |
| Innovative technology play | 41% |
| Enabling decentralization | 29% |
| Free from government intervention | 26% |
| Uncorrelated to other assets | 25% |
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.
- A new transaction is entered, such as someone sending another person bitcoin.
- A block representing the data is created.
- The block is transmitted to a network of peer-to-peer computers around the world.
- 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.
- 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.
| Date | Cryptocurrency Exchange Volume, Spot Market |
|---|---|
| Dec 2019 | $40B |
| Dec 2020 | $386B |
| Dec 2021 | $1T |
| Dec 2022 | $358B |
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.
| Class | Definition | Example |
|---|---|---|
| Digital Currencies | Assets native to blockchains that primarily enable the transfer of value. | Bitcoin |
| Blockchain Infrastructure | Assets that support the development, interoperability, scale, and growth of blockchain technologies. | Ethereum |
| Digital Asset Applications | Assets that are native to an on-chain application that provides a specific service or product to blockchain users. | Uniswap |
| On-Chain Derivatives | Assets that are based on, or have value linked to, a different underlying asset or group of assets. | Tether |
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.
| Index | Description | Asset Count |
|---|---|---|
| MSCI Global Digital Assets Index | Designed to represent the performance of the 30 largest digital assets. | 30 |
| MSCI Global Digital Assets Top 20 Index | Designed to represent the performance of the 20 largest digital assets. | 20 |
| MSCI Global Digital Assets ex Proof-of-Work Index | Designed to represent the performance of digital assets that do not rely on the energy intensive proof-of-work consensus mechanism. | 10 |
| MSCI Global Digital Assets Smart Contract Index | Designed to represent the performance of digital assets associated with Smart Contract features. | 10 |
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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