Hong Kong Fintech Week Day 1: Institutional Investment in Digital Assets - Past, Present and Future

As the world continues to grapple with severe economic fallout from the COVID-19 pandemic, the price of Bitcoin has been on an astonishing bull run, surging over 100% since March.

This resilience and outperformance demonstrates that Bitcoin is here to stay, has a life of its own and most importantly, can stand on its own two feet without intervention from central governments or banks.

Several key factors point to this trend:

  • Global regulation has created favorable conditions for institutional investors to enter the space and helped address misperceptions about digital assets for investors, enabling them to better understand and have confidence in the market

  • The digital asset investment landscape is highly sophisticated and the asset class should be viewed as an uncorrelated hedge against inflation

  • The sector’s existing ecosystem has created healthy competition and innovation. Regulators have now provided the playbook to ensure there is a legitimate, trusted and secure venues to trade and store digital assets with confidence

  • STOs and tokenized securities are the future of capital markets. For instance, payment tokens will bring efficiency to the transfer of value around the world while tokenized securities can shorten holding periods, allow for increased liquidity and thus attract additional investors.

  • COVID-19 has accelerated digital asset adoption of financial institutions 

Institutional investment in digital assets is rapidly increasing

Some of the world’s most prominent investment professionals and household financial brands – e.g. JP Morgan, Paul Tudor-Jones, Fidelity – are now involved in the digital asset space. Asset managers, wealth managers and banks alike now see digital assets as a way to grow market share and acquire additional clients and investors.

Data over the last 10 years has shown Bitcoin to have a higher Sharpe Ratio compared to other traditional assets, meaning investors have received higher risk-adjusted returns over that period. 

Regulation is reducing barriers to entry

The recently announced SFC licensing regime in Hong Kong is geared towards institutional adoption. Hong Kong SFC (Type 9) licensed entities may allocate up to 10% of a fund’s Net Asset Value (NAV) in virtual assets without further accreditation. Therefore, asset managers do not have to apply for additional licenses or variations to their license to deal with digital assets below this threshold.

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