As the ecosystem matures and market infrastructure improves, more institutions are viewing digital assets not just as speculative instruments, but as a legitimate asset class - one that can enhance diversification, unlock new sources of return, and prepare portfolios for the digital future.
Why crypto is gaining traction among institutions
Cryptocurrencies, particularly Bitcoin, have historically shown low correlation with traditional asset classes like equities and bonds. That makes them powerful tools for crypto portfolio diversification, especially during market dislocations. Even a small allocation, 1% to 5%, can improve a portfolio’s risk-adjusted returns. It’s not about making an aggressive bet; it’s about smart diversification in a changing market landscape.
Institutions increasingly view crypto as a high-upside, early-stage opportunity. Like the internet in the 1990s, digital assets represent a technological frontier with massive potential. Blockchain, tokenization, and decentralized applications are laying the groundwork for the next evolution of capital markets.According to Fidelity Digital Assets, more than 90% of surveyed institutions express optimism about crypto’s long-term value. This isn't about chasing hype; it's about staying ahead of structural change and contributing to the long-term momentum behind institutional crypto adoption.
Bitcoin’s limited supply and decentralized nature have led many to compare it with gold. But unlike gold, Bitcoin is liquid, borderless, and programmable, making it a modern hedge against inflation and monetary debasement.
While not all institutions agree on its inflation-hedging effectiveness, those with longer investment horizons, like family offices and sovereign wealth funds, see crypto as a complement to traditional hard assets.
Financial advisors, private banks, and asset managers are responding to a clear signal: clients want crypto exposure. A Bitwise survey revealed that 88% of advisors received crypto-related inquiries in the past year.
Offering digital assets investment strategies is no longer niche. It’s a way to meet client expectations and attract forward-looking capital.
Many institutions are exploring crypto not just for portfolio reasons, but to gain exposure to blockchain’s broader potential. From tokenized bonds to decentralized lending protocols, digital assets are becoming part of the underlying fabric of modern finance.
91% of institutions report interest in tokenized assets, signaling a belief that understanding crypto today prepares them for broader digital transformation tomorrow.
How institutions are gaining exposure
There’s no single approach to how to include crypto in a portfolio. Instead, institutions are tailoring strategies to fit their goals, regulatory context, and operational readiness.
Direct ownership
Family offices and crypto-native hedge funds often begin by directly purchasing major assets like Bitcoin or Ethereum. These holdings are typically secured via institutional-grade custodians.
Funds and ETFs
For traditional players, crypto ETFs and hedge funds offer a familiar on-ramp. These vehicles reduce operational complexity while providing diversified or focused exposure to crypto assets. With the recent approval of spot Bitcoin ETFs in several jurisdictions, many asset managers expect adoption to accelerate as barriers come down.
Institutional adoption of Bitcoin ETFs has risen significantly
Institutional interest in US spot Bitcoin ETFs is accelerating rapidly. According to 13F filings, the number of institutional holders has surged from just 61 in March 2024 to over 3,300 by mid-February 2025. This exponential growth highlights how Bitcoin ETFs are becoming a mainstream vehicle for digital asset exposure, particularly among institutions seeking a secure, regulated entry point into crypto. (Source: Bloomberg, Bitwise Europe; data as of February 16, 2025)
What, if any, of the following exposures are you most interested in allocating to in 2025?
Institutional interest in spot crypto ETFs surged in 2024, jumping from 13% to 22%—reflecting growing demand for regulated, direct exposure to digital assets. While crypto equity ETFs remain the most consistently favored, there's a noticeable rise in appetite for multi-asset crypto funds and individual crypto equities. Notably, the percentage of respondents indicating “no interest” dropped sharply from 44% in 2022 to just 11% in 2024, signaling a broader shift toward proactive crypto allocation strategies heading into 2025. (Source: The Bitwise/VettaFi 2025 Benchmark Survey of Financial Advisor Attitudes Toward Crypto Assets)
Derivatives and structured products
Futures, options, and structured notes allow institutions to express directional views or hedge risk. CME Bitcoin futures, for example, are increasingly used by macro and multi-strategy hedge funds.
Staking and yield strategies
Proof-of-stake assets like Ethereum now allow holders to earn yield by validating transactions and institutions are exploring staking as a way to generate passive income. Others are cautiously experimenting with yield-bearing stablecoins and DeFi lending protocols - though smart contract risks often limit allocation sizes.
Tokenized assets
Tokenization is gaining traction. Leading firms have launched pilots that digitize traditional assets, such as money market funds, credit instruments, or real estate, on public or permissioned blockchains.
Tokenized assets offer:
- 24/7 liquidity
- Fractional ownership
- Enhanced transparency
As regulatory frameworks evolve, tokenized markets could reshape how institutions issue, trade, and settle assets.
Active management
More institutions are moving beyond simple buy-and-hold strategies and turning to active management to navigate crypto’s fast-moving markets. Unlike passive approaches, this style involves regularly adjusting portfolio positions based on market signals, macro trends, and technical indicators.
From trend-following to tactical asset allocation and quantitative models, these strategies help institutions respond to volatility in real time - seizing opportunities and managing downside risk. As crypto markets evolve, active management is proving to be a powerful way to unlock the asset class’s potential while maintaining discipline.
Distribution Active vs. Passive Strategies | Funds %
Distribution Active vs. Passive Strategies | AUM %
New data from HFR’s expanded classification of crypto hedge fund strategies reveals a clear tilt toward active management. While 70% of crypto funds use active strategies, those strategies account for a slightly smaller share of total AUM—just over 57%. This suggests that while passive products are growing, institutions still favor actively managed approaches when navigating crypto’s complexity, volatility, and opportunity. As HFR continues to track 145+ funds across 11 sub-strategies, this breakdown offers deeper insight into how capital and conviction are being allocated in the evolving digital asset space. (Source: HFR WORLD: New Crypto Sub-Strategies)
Key challenges institutions still face
Despite the momentum, institutional adoption of crypto is not without obstacles. Here are the top concerns:
Many institutions are watching and waiting for clearer rules. However, progress is being made. Europe’s MiCA framework is providing needed clarity, and spot ETF approvals are beginning to shift sentiment.
Crypto is still volatile. This makes crypto a tough sell for conservative investment committees.But volatility is manageable:
- Position sizing keeps the downside in check
- Derivatives offer hedging options
- Time horizon matters - long-term views help smooth cycles
Securing private keys and managing digital wallets requires specialized expertise. Institutional-grade custodians now offer insured, regulated solutions, but for many, operational readiness is still a work in progress.
The industry’s early years were marred by scandals, fraud, and bankruptcies. Events like the FTX collapse remain fresh in the minds of investment boards.
But institutional involvement is driving better standards:
- Audits and compliance requirements are increasing
- Counterparty risk frameworks are improving
- Governance is becoming a differentiator
The Outlook: From alternative to allocation staple
The long-term trajectory is clear: crypto is transitioning from a speculative asset to a strategic allocation. This shift is emblematic of the rapid acceleration in institutional crypto adoption, driven by better infrastructure, growing investor education, and regulatory clarity.
Rising allocations
Research suggests institutional allocations could double in the next three years, rising from ~3% today to 6–7% by 2027 (Source: Funds Europe)
Expanded participation
Expect broader entry from pension funds, endowments, and sovereign wealth funds as regulatory and repetitional concerns are addressed.
Seamless infrastructure
Crypto infrastructure is starting to mirror traditional finance:
- Prime brokers for digital assets
- Multi-custodian models
- Real-time risk dashboards
This integration will make it easier for institutions to manage crypto alongside equities, fixed income, and alternatives.
Tokenization and interoperability
We’re on the cusp of a broader shift to blockchain-based asset issuance and transfer. Real-world assets, from treasuries to commercial real estate, are already being tokenized. As this expands, crypto will be just one part of a larger digital ecosystem.
Final thoughts: A measured approach, a strategic advantage
Institutional investors are no longer asking if crypto belongs in portfolios. They’re asking how to do it strategically, safely, and at scale.
The takeaway is simple: start small, learn fast, and scale with conviction. Institutional crypto adoption isn’t just a trend—it’s a strategic move. Digital assets are here to stay, and institutions that build expertise today will be better positioned to capture value tomorrow.
Crypto isn’t replacing traditional assets - it’s complementing them. And for sophisticated investors seeking diversification, growth, and future-proofing, that makes crypto one of the most compelling asset classes of our time.
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The full breakdown
In our first article, "Navigating Crypto Volatility: The Advantages of Active Management," we explored how the high volatility and low correlation of digital assets with traditional asset classes create unique opportunities for active managers. We discussed how these characteristics enable active managers to execute tactical trading strategies, capitalizing on short-term price movements and market inefficiencies. Building on that foundation, we now turn our attention to the unique market microstructure of digital assets.
Conducive market microstructure of digital assets
The market microstructure of digital assets - a framework that defines how crypto trades are conducted, including order execution, price formation, and market interactions - sets the stage for active management to thrive. This unique ecosystem, characterized by its continuous trading hours, diverse trading venues, and substantial market liquidity, offers several advantages for active management, providing a fertile ground for sophisticated investment strategies.
24/7/365 market access
One of the defining characteristics of digital asset markets is their continuous, round-the-clock operation.
Unlike traditional financial markets that operate within specific hours, cryptocurrency markets are open 24 hours a day, seven days a week, all year round. This continuous trading capability is particularly advantageous for active managers for several reasons:
- Immediate response to market events: Unlike traditional markets that close after regular trading hours, digital asset markets allow managers to react immediately to breaking news or events that could impact asset prices. For instance, if a significant economic policy change occurs over the weekend, managers can adjust their positions in real-time without waiting for markets to open.
- Managing volatility: Continuous trading provides more opportunities to capitalize on price movements and volatility. Active managers can take advantage of this by implementing strategies such as short-term trading or hedging to mitigate risks and lock in gains whenever market conditions change. For instance, if there’s a sudden drop in the price of Bitcoin, managers can quickly sell their holdings to minimize losses or buy in to capitalize on the lower prices.
Variety of trading venues
The proliferation and variety of trading venues is another crucial element of the digital asset market structure. The extensive landscape of over 200 centralized exchanges (CEX) and more than 500 decentralized exchanges (DEX) offers a wide array of platforms for cryptocurrency trading. This diversity is beneficial for active managers in several ways:
- Risk management and diversification: By spreading trades across various exchanges, active managers can mitigate counterparty risk associated with any single platform. Additionally, the ability to trade on both CEX and DEX platforms allows managers to diversify their strategies, incorporating different levels of decentralization, regulatory environments, and security features.
- Arbitrage opportunities: Different venues often exhibit price discrepancies, presenting arbitrage opportunities. For example, managers can buy an asset on one exchange at a lower price and sell it on another where the price is higher, thus generating risk-free profits.
- Access to diverse liquidity pools: Multiple trading venues provide access to diverse liquidity pools, ensuring that managers can execute large trades without significantly impacting the market price.
Spot and derivatives markets (Variety of instruments)
The seamless integration of spot and derivatives markets within the digital asset space presents a considerable advantage for active managers. With substantial liquidity in both markets, they can implement sophisticated trading strategies and manage risk more effectively.
For instance, as of August 8 2024, Bitcoin (BTC) boasts a daily spot trading volume of $40.44 billion and an open interest in futures of $27.75 billion. Additionally, derivatives such as futures, options, and perpetual contracts enable managers to hedge positions, leverage trades, and employ complex strategies that can amplify returns.
Overall, the benefits for active managers include:
- Hedging and risk management: Derivatives offer a powerful tool for hedging against unfavorable price movements, enabling more efficient risk management. For instance, a manager holding a substantial amount of Bitcoin in the spot market can use Bitcoin futures contracts to safeguard against potential price drops, thereby enhancing risk control.
- Access to leverage: Managers can use derivatives to leverage their positions, amplifying potential returns while maintaining control over risk exposure. For instance, by employing options, a manager can gain exposure to an underlying asset with only a fraction of the capital needed for a direct spot purchase, thereby enabling more capital-efficient investment strategies.
- Strategic flexibility: By integrating spot and derivatives markets, managers can implement sophisticated strategies designed to capitalize on diverse market conditions. For instance, they may engage in volatility selling, where options are sold to generate income from market volatility, regardless of price direction. Additionally, managers can leverage favorable funding rates in perpetual futures markets to enhance yield generation. Basis trading, another strategy, involves taking offsetting positions in spot and futures markets to profit from price differentials, enabling returns that are independent of market movements.
Exploiting market inefficiencies
Digital asset markets, being relatively nascent, are less efficient compared to traditional financial markets. These inefficiencies arise from various factors, including regulatory differences, market segmentation, and varying levels of market maturity. For example:
- Pricing anomalies: Phenomena like the "Kimchi premium," where cryptocurrency prices in South Korea trade at a premium compared to other markets, create arbitrage opportunities. Managers can exploit these by buying assets in one market and selling them in another at a higher price.
- Exploiting mispricings: Active managers can identify and capitalize on mispricings caused by market inefficiencies, using strategies such as statistical arbitrage and mean reversion.
The unique aspects of the digital asset market structure create an exceptionally conducive environment for active management. Continuous trading hours and diverse venues provide the flexibility to react quickly to market changes, ensuring timely execution of trades. The availability of both spot and derivatives markets supports a wide range of sophisticated trading strategies, from hedging to leveraging positions. Market inefficiencies and pricing anomalies offer numerous opportunities for generating alpha, making active management particularly effective in the digital asset space. Furthermore, the ability to hedge and manage risk through derivatives, along with exploiting uncorrelated performance, enhances portfolio resilience and stability.
In our next article, we'll delve into the various techniques active managers employ in the digital asset markets, showcasing real-world use cases.
