Digital assets are becoming an integral part of institutional portfolios, boosting the demand for appropriate custodial services.

Increasingly mature blockchain technology and digital security infrastructure, ongoing efforts to achieve global regulatory clarity, and digital innovations such as tokenized real-world assets are driving more institutional investors to include digital assets in their portfolios, according to the latest report from cryptocurrency trading platform OKX.

The value of tokenized assets is forecast to hit US$10.9 trillion by 2030, from US$400 billion last year, the report shows.

Currently, average digital asset allocations in institutional portfolios range from 1% to 5%, depending on the risk appetite, with investments focused on cryptocurrencies, particularly bitcoin and ether.

However, the expanding availability of a wider range of investment vehicles is encouraging institutional investors to venture beyond cryptocurrencies. New digital asset options include spot exchange-traded funds (ETFs), crypto private equity/venture capital investments, crypto derivatives, stablecoins, and non-fungible tokens (NFTs).

At the beginning of 2024, the US Securities and Exchange Commission (SEC) approved 11 spot bitcoin ETFs for trading, boosting the overall inflows into bitcoin. As of March, institutional investments in the cryptocurrency surpassed US$40 billion. In July, 13 spot ether ETFs followed suit, with the volume exceeding US$1 billion on their trading debut.

In Hong Kong, the Securities and Futures Commission (SFC) approved in April six spot bitcoin and ether ETFs for trading, marking the launch of spot cryptocurrency ETFs in Asia. Trading is expected to attract up to US$25 billion into the market.

Voicing optimism over the institutional adoption of digital assets, Graphene Investments chief executive Ataf Ahmed says: “The majority of portfolios will increasingly incorporate some form of digital assets as real-world assets become tokenized. Most securities, bonds, and central bank digital currencies will all be on the blockchain moving forward.”

Current trends in institutional allocations reveal variations in the volume of digital assets under management. Firms with larger assets under management (AUM) allocate less shares to digital assets. Only 6% of firms with AUM greater than US$500 billion allocate between 5% and 10%, while 34% of firms with AUM under US$50 billion allocate a similar proportion.

Allocation behaviour also varies according to the type of institutional investor. For instance, traditional hedge funds remain cautious in increasing their exposure to digital assets. The OKX report shows that 54% of traditional hedge funds are unlikely to invest in cryptocurrency assets over the next three years. They are, however, more bullish on tokenization – 31% regard tokenization as the most significant future market opportunity.

As digital assets reside solely online, they are vulnerable to risks emerging from the technology ecosystem. These include cybersecurity risks and hacking, systems failure, transaction irreversibility, and loss of private keys.

As such, custody solutions tailored to digital assets will remain a key driver of institutional adoption. These include self-custody using hot and cold wallet (or hybrid) mechanisms for private key management, use of exchange wallets, and third-party custodians, according to the report.