Global investors hold more than 10% of their wealth in crypto asset, new study says

By Puja Sharma

The strong performance of Bitcoin during the Coronavirus crisis means that 90% of institutional investors and wealth managers surveyed agree that professional investors should have a small allocation to digital assets in their portfolios.

A new study of institutional investors and wealth managers, who collectively manage around $110b in assets, reveals that 15% believe that long-term over 10% of the funds they help to manage will be in digital assets, including cryptocurrencies and tokenized investment vehicles.

The research, which was commissioned by London-based Nickel Digital Asset Management (Nickel), Europe’s leading regulated and digital assets hedge fund manager founded by senior traders and investment professionals formerly from major financial institutions including Goldman Sachs and JPMorgan, reveals 38% of the professional investors interviewed expect the funds they help run to have between 5% and 10% held in digital assets; 26% believe the figure will be between 3% and 5%, and between 1% and 3% is expected by one in five (19%).

The strong performance of Bitcoin during the Coronavirus crisis means that 90% of institutional investors and wealth managers surveyed agree that professional investors should have a small allocation to digital assets in their portfolios.

Nickel has reviewed the effects of a small, single-digit allocation of Bitcoin on diversified portfolios. Over 9 years, between 31 December 2012 and 31 December 2021, a diversified portfolio of 60% equities (S&P500 Total Return) and 40% bonds (US Treasuries Total Return) would have delivered a cumulative total return of 160% with portfolio risk (Std Dev) of 9.8% and max drawdown of 21.6% (caused by equities selloff in March 2020).

However, the model shows that an allocation of just 1% to crypto would have increased the portfolio return by a meaningful 29%, to 189%, over the reviewed period. Counterintuitively, this allocation would not have hurt the portfolio’s risk, which remained at 9.8%, while the max drawdown also would have remained flat at 21.6%. These fundings reflect the uncorrelated nature of digital assets relative to other asset classes and highlight Bitcoin’s important diversification qualities.

The analysis further reveals that for an allocation of 5% to Bitcoin, the portfolio’s cumulative return would have been 355%, i.e. more than doubling cumulative portfolio return as compared to a portfolio with no allocation to crypto. The standard deviation would have remained under control, increasing from 9.8% to 10.1%, while max drawdown would have increased marginally from 21.6% to 21.8%. All this resulted in a strong boost to Sharpe ratio from 1.08 to 1.62.

Anatoly Crachilov, CEO and Founding Partner of Nickel Digital, said: “Our analysis of a statistically significant 9-year period reveals an asymmetric positive impact of a single-digit allocation of crypto assets to institutional portfolios, as such allocation strongly improves risk-adjusted returns, without compromising risk framework of the underlying portfolio. It comes as no surprise that long-term institutional allocators are contemplating allocation to digital assets as part of their portfolio construction.”

Nickel currently has four funds investing in the digital asset space. Its market-neutral Digital Asset Arbitrage Fund pursues an absolute return strategy without expressing directional views on the underlying crypto-assets market. It exploits market inefficiencies and price dislocations and harnesses swings of volatility to deliver consistent positive returns within a strictly defined risk management framework.

Nickel’s Digital Gold Institutional Fund, a Bitcoin tracker, provides secure, efficient, transparent, and liquid access to physically allocated Bitcoin.