Institutional investors set to dominate digital assets

Lily Zhang

Huobi Group CFO

The crypto market turmoil in recent months has attracted a category of investors known to thrive on market volatility and instability: hedge funds. A survey by quantitative technologies vendor SigTech in Q2 shows that nearly a third of hedge fund managers believe digital assets will offer the largest alpha-generating opportunity over the next three years, exceeding equities and fixed income.

However, it’s not just hedge funds that are setting their sights on cryptocurrencies – other institutional investors such as pension funds, family offices and insurance firms look set to muscle into the action too.

Growing dominance of institutional investors

A recent study by Canada-based digital currency asset manager Grayscale Investments found that institutional investors are likely to displace retail investors as the dominant players in cryptocurrencies, with 71% of professional investors expecting institutions to hold 60% of digital assets within seven years.

These findings mirror what we have seen at Huobi, where there has been a gradual but clear shift in our institutional client base. While it used to be dominated by crypto natives that were involved in institutional staking, we now see growing interest from the broader institutional market. This includes traditional financial institutions such as asset managers and large hedge funds, which are staking their assets in the next 6 to 12 months.

Recently, the Huobi Research Institute interviewed more than 20 institutional investors across the world to shed more light on their development and the opportunities they are pursuing. Their current areas of focus include infrastructure projects, with an emphasis on zero-knowledge proof, new Layer 1 chains and middleware. In terms of applications, DeFi, GameFi and social ranked in the top three, with DeFi being the clear favorite.

How institutional and retail investors differ

The ability to attract and retain institutional investors requires a sound understanding of their needs, which differ from retail investors. These include key areas such as:

  • Custody: Understanding who will hold the keys is important to figure out at the outset, as asset security has emerged as a top concern given the numerous crypto heists that have occurred.
  • Compliance: Licensed exchanges are key as many professional and institutional investors simply cannot invest their money through an unregulated exchange due to the regulatory restrictions.
  • Scale and liquidity: This is especially important for larger institutional investors, that need to be able to enter and exit large positions quickly while avoiding slippage.

As the crypto industry further grows and matures, Huobi will continue to apply for more licenses and international certifications, to make it a compliant gateway for more institutions. We will also keep our focus on user asset security as our top priority. These moves will position Huobi strongly to seize future opportunities from the rising wave of institutional interest.

Photo by Sean Pollock on Unsplash