The biggest names in the world of banking, finance and investment are often mentioned in the same breath as cryptocurrencies – despite digital currencies like Bitcoin being launched as an alternative to the incumbent international financial system.
Established names in traditional finance are often brought up with cryptocurrencies because someone in a leadership position has been critical of these would be disruptors of the financial establishment and international economic order.
Examples include then Goldman Sachs chief executive Lloyd Blankfein saying of Bitcoin in 2017:
“Something that moves 20% [overnight] does not feel like a currency. It is a vehicle to perpetrate fraud.”
And Jamie Dimon, CEO of JPMorgan Chase stating in his 2022 testimony to Congress that cryptocurrencies including Bitcoin were dangerous “decentralized Ponzi schemes”.
Institutional investors criticise cryptocurrencies while rolling out crypto-focused products and services
But at the same time, institutional investors are increasingly mentioned in the context of new services and products they are planning or launching in the crypto space. Including the very institutional investors whose top brass have previously (and often currently) urged caution when it comes to cryptocurrencies – or directly disparaged them.
Earlier this year, Mathew McDermott, Goldman Sachs’ global head of digital assets admitted “we do have a crypto trading desk at the firm”, while carefully emphasising that the bank only trades cash-settled derivatives, options and futures.
An active crypto trading desk at a bank whose CEO had called Bitcoin “a vehicle to perpetuate fraud”, just a few years earlier is quite a shift.
It is fair to say that Goldman Sachs is more invested in blockchain technology and its future role in mainstream financial services infrastructure than it is in cryptocurrencies.
But it certainly is very interested in the digital assets and blockchain technology space. That means it is now also engaging with cryptocurrencies like Bitcoin in a way that tacitly recognises they are a genuine, even if alternative and risky, asset class. Hence the bank’s crypto trading desk.
As of late last year, Goldman had invested in 11 digital asset companies that provide services such as compliance, cryptocurrency data and blockchain management.
McDermott is a board observer at Elwood Elwood Technologies, a London-based firm that builds infrastructure to help institutional investors trade cryptocurrency that is one of Goldman Sach’s investments in the space.
Goldman’s current CEO David Solomon, who succeeded Blankfein in 2018 has taken a less overt stance on cryptocurrencies. He has described them as “highly speculative” but also commented on the potential of blockchain technology on multiple occasions.
Even JP Morgan, whose chief executive Dimon has continued to make critical comments of cryptocurrencies, calling them “pet rocks” as recently as last year, offers some crypto-related services such as payments and exchanges.
It also has its own blockchain platform – Onyx which, among other services related to payments, clearings and information exchange between banks, offers “a network enabling the exchange of value for various types of digital assets.”
Blackrock, the world’s biggest asset manager by capital under management has submitted a proposed ETF that would be designed to track the spot price of Bitcoin. Rival Fidelity is also waiting for the SEC to rule on its own spot Bitcoin ETF.
Both companies are among the biggest institutional investors in the world. And they are actively attempting to launch products that offer investors exposure to cryptocurrencies.
The Japanese financial services giant Nomura has just launched The Bitcoin Adoption Fund through its digital assets subsidiary Laser Digital. The fund will provide long-only Bitcoin exposure to institutional investors and is the first in a planned range of digital asset investment products by Laser Digital regulated by Dubai’s Virtual Asset Regulatory Authority (VARA).
Are institutional investors now onboard with and invested in cryptocurrencies?
Does that mean mainstream finance and institutional investors have reached the conclusion cryptocurrencies aren’t going anywhere and will, at least, further establish themselves as an alternative asset class?
Are the crypto-market products and services being launched by institutional investors evidence they have been convinced? Or are they simply hedging their bets while placating client demand at the risk of otherwise losing business to less scrupulous rivals?
A recent EY Partheon report describes the growing institutional investor activity in the digital assets and crypto space over the past few years as having led to:
“….the first meaningful institutional-grade implementations of blockchain technology by major traditional finance (TradFi) organizations, including the launch of digital asset custody, launch and usage of tokenized deposits and settlement coins, numerous central bank digital currency (CBDC) pilots, settlement of digital bonds on public ledgers, tokenization of private funds, intraday repo transactions occurring on the blockchain, and expansion of numerous use cases supporting payments and money movement.”
“In addition, many TradFi organizations continued forward in their build-out of digital asset offerings for their retail and institutional clients.”
The report concludes on the basis of a survey of 250+ financial institutions of their sentiment, use and plans for blockchain technology and digital assets:
“Our findings suggest they are staying the course and are not moving away from crypto/digital assets, but are approaching their investments carefully with educated, tempered optimism.”
“Institutions overwhelmingly believe in the long-term benefits of crypto/digital assets, and their abundance of caution stems primarily from concerns regarding regulatory uncertainty, identification of trusted institutions to partner with, and the need to ensure security and safe custody of this novel asset class.”
So how invested are institutional investors in cryptocurrencies and digital assets? The EY Pavilion survey found:
- 35% noted allocating 1%-5% to digital assets and/or related products.
- 60% indicated they allocate more than 1% of their portfolio to digital assets and/or related products.
- Respondents with smaller assets under management (AUM)/assets under administration (AUA) tended to allocate a greater portion of their portfolio to these products – 45% of institutions with more than $500b in AUM responded that they allocate more than 1% of their portfolio.
- These figures suggest institutional investors have a large amount of capital invested in the digital assets space.
- Most organizations plan to scale investments over the next two to three years.
How are institutional investors investing in the crypto and digital assets sector?
The EY report pinpoints spot cryptocurrency investments as the most common with positions on bitcoin (BTC) and Ethereum (ETH) the most prevalent – however, 60% of institutions invested in spot cryptocurrency currently are also invested in other cryptocurrencies beyond the ‘big 2’.
Surveyed representatives of institutional investors said they expected spot cryptocurrency positions to continue to be the most common investment in the crypto space. However, from 2025 on, institutions expect to allocate more to other vehicles like “funds that are tracked to crypto” and “private equity/venture capital (PE/VC)-style investments” in digital asset firms.
Another major area of interest is tokenization – especially of assets institutional investors hold including public funds, private funds and REITs. The belief is that re-imagining these assets classes on blockchain technology would result in access to new investors and capital and improved liquidity.
Follow the money to understand what institutional investors really think about cryptocurrencies
It is important to note that institutional investors seeing trading cryptocurrencies as a profit-making opportunity and responding to client demand for crypto-related products and services does not mean they are convinced Bitcoin is here to stay.
It does mean that they believe cryptocurrencies and digital assets in some form, And that blockchain technology and tokenisation will become a major part of financial markets and the infrastructure they run on.
Incumbent cryptocurrencies like Bitcoin and Ethereum’s ether may or may not have a long term future. They may be superseded by new independent cryptocurrencies based on more efficient blockchain technology, or CBDCs (central bank digital currencies) – digital only equivalents of fiat currencies.
But institutional investors are showing they are convinced enough that cryptocurrencies and digital assets are here to stay to invest in the space – not only by trading cryptocurrencies but in building infrastructure and IP.