In the world of investing, something new is happening. Cryptocurrency is becoming a big deal, and everyone from hedge funds, financial advisors to asset managers are starting to pay attention. Unlike the stock market, which opens and closes each day, the world of cryptocurrency is always on, always moving.
A recent study by Amberdata (2023) shows that 48% of institutional investors now manage digital assets. In the coming half-decade, a significant majority of managers, nearly 75%, anticipate an increase in the assets under management (AUM) in the digital space. Over 40% of them are predicting a robust growth rate, expecting an expansion of more than 11-20%.
The 'Institutionalising Digital Assets' report (2023) highlights that there has been a notable increase in enthusiasm for crypto investments among fund allocators, with close to 39% of companies indicating they have received requests to provide a digital asset investment option.
Yet, for all its allure, those who venture into the cryptocurrency market are faced with challenges that are both complex and costly, especially because the crypto market never stops – it’s always open. This constant operation means asset managers have to be on their toes all the time, which can be expensive and complicated.
Companies need to invest in sophisticated systems to manage risks and also pay more for experts to substitute for their lack of know-how. There's also the challenge of keeping a good reputation and adapting to new ways of doing business. Moving into crypto is a big shift from what many firms usually do, it could risk their established reputation. It's important for firms to find the right mix of trying new things while staying true to what they've always been good at.
Security is a big worry for people investing in digital currencies and managing online wallets that are used a lot for trading. These concerns are common among investors who are used to more traditional ways of keeping their investments safe.
Experienced asset managers are also very careful about the fixed rules of trading in crypto, like the risks involved with who you're trading with and how the actual process of exchanging digital currencies is done. These are important parts of trading that they can't ignore or change. So, they're approaching this new area with a careful balance of wanting to try new things but also keeping the tried-and-true rules in mind.
The cryptocurrency landscape has experienced explosive growth, with the amount of digital assets under management skyrocketing from under a billion dollars to a staggering quarter of a trillion dollars in just two years (Institutionalising Digital Assets report, 2022). This rapid expansion has naturally led to heightened scrutiny and concern from institutional investors and asset managers who are managing large-scale assets.
The intricacies of asset management within cryptocurrency exchanges demand that fund managers maintain strict control over the assets traded, which they often do on behalf of their investors. This necessitates a robust and costly custodial infrastructure to ensure the alignment of fund management activities with investor agreements. According to Dan Smith, president and head of US Fund Services Operations at Trident Trust, it’s crucial for providers to offer solutions that align closely with traditional financial operations. He underscores the importance of innovative solutions like ClearLoop by Copper, which allows for trading on exchanges without the need to transfer assets to those exchanges, thereby reducing risk and cost. The cost of such custodial services, as Smith notes, can be a significant overhead for asset managers, particularly for smaller and emerging hedge funds that must judiciously balance growth aspirations with cost considerations.
For those willing to invest in the necessary technology and expertise, the potential rewards could be substantial. The key lies in embracing the uniqueness of the crypto markets and leveraging their round-the-clock nature to gain a competitive edge.
Firms are also finding new ways to manage the problems posed by crypto markets. For those willing to embark on a 'discovery mission', to ask the right questions, and to choose the right solution, the digital assets market is not a problem but a puzzle waiting to be solved.
Portfolio management, trading, secure custody, compliance are the four fundamental pillars of ICONOMI Wealth. Our solution mirrors the regulated framework of traditional financial institutions, thereby instilling a sense of trust and security in the offering. It streamlines your operations, reducing the need for costly technology and complex solutions, allowing you to focus on what you do best - generating Alpha for your clients.
ICONOMI Wealth bridges the gap between the high security of cold storage and the easy access of hot wallets, catering to the varied needs of proactive traders and long-term holders alike. This approach to custody, combining cutting-edge technology with traditional safeguards, is pivotal in mitigating the inherent risks associated with cryptocurrency investment and in preserving the trust and reputation among your clients.
For a more detailed understanding book a call with our team.
Amberdata. (2023) 'Digital Assets: Emerging Managers Fuel Data Infrastructure Needs'. Available at: [https://go.amberdata.io/hubfs/Digital-Assets-Emerging-Managers-Fuel-Data-Infrastructure-Needs-AMBERDATA-23-2041-FINAL.pdf] (Accessed: 7 December 2023).
[Hedgeweek]. (2023) 'Institutionalising Digital Assets: Powering the Hedge Fund Crypto Surge'. Available at: [https://issuu.com/globalfundmedia/docs/institutionalising_digital_assets_powering_the_hed?fr=sYTFiMDQ2MzI2NTc] (Accessed: 7 December 2023).