It is clear that crypto is having its institutional moment. The investment decision is moving from speculation to allocation, and we are witnessing the maturation of crypto and digital asset investors in the process. In formalizing a dedicated digital asset investment strategy, institutional investors should assess the landscape thoughtfully with the goal of building an optimally constructed portfolio to achieve their desired investment objectives. Below, we summarize our top 10 takeaways from 2020 for institutional investors, based on our recent report “An Institutional Take on the 2020/2021 Digital Asset Market.”
This post is part of CoinDesk’s 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. Dan Zuller, CFA, is a partner at Vision Hill Group, an investment consultant and asset manager in digital assets.
1. Active management roars back.
Following a challenging 2019 market in which concentration in bitcoin (largely viewed as the market’s beta, or its headline volatility indicator) prevailed over distinctive asset diversification, active management came roaring back in 2020. According to VisionTrack data as of October 2020, crypto hedge funds generated net returns of +116% on average, outperforming bitcoin (+92%) by approximately 2,400 basis points (bps).
2. For investors, 2020 was the year of DeFi and asset selection.
DeFi stands for decentralized finance and can be best thought of as an emerging sector within the frontier digital asset market. Total value locked in DeFi contracts surged 25x to ~$15 billion as of the end of November, from ~$600 million in January. Investors that put capital to work in this thematic sector of digital assets generally outperformed bitcoin and the digital asset market beta in 2020.
3. Digital asset yields are sustainable, for now.
Digital assets offer highly attractive yields compared to traditional market instruments such as high-yield savings accounts. Will that continue? Growing demand from institutional counterparties and borrowers such as hedge funds, over-the-counter (OTC) desks, market makers and liquidity providers leads us to believe these yields are sustainable for the foreseeable future.
4. The remarkable rise, fall and rise again of crypto derivatives.
After a challenging 2018-2019 market regime, crypto derivatives have made a fascinating comeback in 2020. CME BTC daily futures volumes recently peaked at $2.2 billion at the end of November 2020 while Bakkt BTC daily futures volumes peaked at $178 million in September. “First a trickle and then a flood,” once the industry’s mantra back in 2018-2019, has proven true in 2020.
5. Crypto hedge funds are institutionalizing, but some more than others.
There are now a variety of beta- and alpha-focused hedge fund strategies rising to institutional…