As we at M11 Funds reflect on the upcoming year, 2024 stands out as a pivotal moment for the institutional adoption of digital assets. Our journey as a leading asset manager in the digital asset space, with a focus on active management, has given us insights into the evolving landscape of this market. Looking ahead, we see a convergence of factors that signal a significant shift in how institutions engage with digital assets.
The catalyst for this transformation is expected to be the United States’ Securities and Exchange Commission’s (SEC) approval of a spot Bitcoin ETF in January 2024. This milestone, we believe, will significantly influence the market, marking a new era of investment in the liquid digital assets market. The subsequent approval of a spot Ethereum ETF will further enhance the development of additional passive digital asset products. This shift towards passive inflows is something we're closely monitoring, as it is likely to invigorate the active management side of the liquid digital assets markets, particularly in the realm of hedge funds.
Our projections suggest that the inflow to Bitcoin ETFs post-approval could be as high as $14.4 billion in the first year, heralding a wider acceptance of digital assets. Addressing the current custody challenges is essential for this growth. With the SEC’s approvals, we anticipate a more accessible market for institutional investors, many of whom are keen to integrate digital assets into their portfolios. According to EY, 60% of institutional investors are planning to allocate more than 1% of their portfolios to digital assets, with 25% intending to increase their allocations. The entry of prominent managers like BlackRock and Fidelity into offering spot ETFs will likely ease the reservations of custodians, facilitating a smoother adoption process.
Another trend we foresee is the expansion of the liquid side of the digital asset market, which has predominantly been characterised by illiquid investments such as venture funds. Martijn van Veen, Managing Director at M11 Funds, points out that these funds currently make up two-thirds of the market. The introduction of more passive products by major asset management players is expected to shift capital towards liquid assets, a development we are preparing to engage with.
Martijn reflects on this: “The coming year will mark a turning point for the adoption of digital assets by institutions. We anticipate a significant influx of capital, especially in the liquid markets, following a wave of spot ETF approvals by the SEC. While we expect the liquid markets to remain predominantly passive in 2024, the early stage of the asset class’s cycle, characterised by information asymmetries, provides ample opportunities for hedge fund managers to create value on the active side. We at M11 Funds are strategically positioned with our Liquid Token Fund to leverage these emerging opportunities.”
