M11 Funds sets an optimistic outlook for institutional adoption of digital assets in the coming year. The boutique asset manager in the digital asset space with an active management strategy indicates this shift will occur due to a trio of factors. The most primary being the United States’ Securities and Exchange Commission’s (SECs) spot Bitcoin approval, which is slated for January 2024.
According to the digital asset fund, the SEC’s approval of a spot Bitcoin will open up the floodgates for a continuous flow into the liquid digital assets market. This move, along with the approval of a spot Ethereum, will lay the groundwork for creating additional passive digital asset products. Thanks to the increase in passive inflows, M11 Funds also expects to see an uptick on the active management side of the liquid digital assets markets, in the form of hedge fund activity.
Inflows to Bitcoin ETFs alone post-approval are estimated to be as high as $14.4 billion in the first year. A knock-on effect of which will be broader adoption of the digital asset class.
The second industry shift that the SEC’s approvals will affect is custody, as this is a major blocker to adoption. Institutional investors want to include digital assets in allocations. EY research notes that 60% of institutional investors plan on allocating more than 1% of portfolios to the asset class, and 25% plan on increasing their allocations. Yet many custodians either cannot or will not onboard the asset class. This hesitation will fade as spot ETFs are approved and prominent managers like BlackRock and Fidelity begin offering them, placing downward pressure on custodians.
The third shift that is powered by the spot ETF approvals is an increase in the liquid side of the digital assets market. Currently, the industry is dominated by illiquid prospects, the lion’s share of which are venture funds, which M11 Funds Managing Director Martijn van Veen says account for two-thirds of the market. With the influx of more passive products issued by the most prominent players in the asset management industry, more capital with flow towards liquid assets.
Martijn van Veen, Managing Director & Partner, M11 Funds: “Next year will be the year for institutional adoption of digital assets. We anticipate that on the back of a tsunami of spot approvals by the SEC, as requested by many of the largest asset managers, more passive ETF-like products will enter the market and broad adoption by custody banks will ensue. With more passive products entering the market, there will be a constant influx of new capital, especially on the liquid side of things. While liquid markets will still be mostly passive in 2024, the nascent cycle of the asset class will still largely be driven by general information asymmetries, leaving ample room for hedge fund managers to generate alpha on the active side of things. With this in mind, we are very well positioned with our Liquid Token Fund to start taking advantage of this opportunity.”
