Historically, institutions have kept their distance from digital assets for a variety of reasons, including a lack of custody capabilities, and liquidity and volatility concerns.
"Institutional investors have an understanding that this is a more speculative investment," said Christopher Levell, partner at consultant NEPC LLC in Boston. "It's relatively easy to make the case that bitcoin could be $1 million or it could be zero. It's got a ton of convexity."
TOBAM, a Paris-based asset manager with $10.2 billion in AUM, launched a bitcoin fund in 2017. Yves Choueifaty, TOBAM's president and chief investment officer, said bitcoin, the biggest digital currency, can be a precarious investment on its own, but the risk of an asset should determine the size of the investment, not the investment case itself. He compared bitcoin to chlorine: As a "combat gas, it's very dangerous, but if you put a drop of chlorine in water, it's drinkable." If an investor puts 1% of bitcoin in a 60%/40% portfolio, its volatility won't be felt, he said.
Akbar Thobhani, CEO and co-founder of San Francisco-based cryptocurrency prime broker-dealer SFOX Inc., which offers clients cryptocurrency trading and custody options, said the learning curve for institutional investors has been steep. "When you're investing in the traditional markets, the infrastructure is there, the rules and regulations are in place, and when you come to crypto, it's like a whole new world," he said.
Whereas in years past institutions were merely asking questions trying to figure out what digital assets were, more are now interested in learning the best ways to incorporate these assets in their portfolios, sources said. "If you're a fiduciary, you cannot ignore the reality that the highest-performing asset of the last decade has been bitcoin," said Matthew Le Merle, San Francisco-based managing partner of Blockchain Coinvestors, a blockchain fund of funds. "You could argue that it's not sustainable or intrinsically not appropriate, but at the end of the day your goal is to try and in a disciplined way both protect and manage the assets you have under management and make them grow."
As the digital-asset market continues to mature, the hurdles preventing institutions from getting involved have dissipated, Mr. Jessop said, including prior liquidity concerns. "I think it's a self-fulfilling prophecy, more investors coming into the space attracts more liquidity, which increases the size of the liquidity pool, which attracts more traditional investors, and that's all been very healthy," he said.
Earlier this month, the cryptocurrency market capitalization topped $2 trillion for the first time, according to market tracker CoinGecko.
The perception of digital assets improved in 2020, with 58% of U.S. investors expressing a neutral or positive perception, up from 43% in 2019, according to a Fidelity Digital Assets survey released in June.
And sources expect that perception to continue to warm after recent developments in the space.
The price of bitcoin has surged over $63,000, up from about $8,000 last April, and digital currency exchange Coinbase Global Inc. had a successful initial public offering on April 14, with a market valuation of $86 billion. Also, Tesla Inc. announced in a February Securities and Exchange Commission filing that it had bought $1.5 billion worth of bitcoin.
Also in February, Bank of New York Mellon Corp. announced the formation of a digital assets unit and is developing a multiasset digital custody and administration platform for traditional and digital assets.
And Goldman Sachs Group Inc. is relaunching its cryptocurrency trading desk, Matthew McDermott, global head of digital assets for Goldman Sachs' global markets division, said on a company podcast in March.
"There's a virtuous cycle here where these problems are solving themselves because of the market demand," Mr. Jessop said.