Digital assets are becoming an increasingly popular investment tool for institutional investors looking to maximize their returns. From hedge funds to endowments, more and more large-scale investors are allocating a portion of their portfolios to digital assets such as Bitcoin, Ethereum, and Litecoin.
Why? Because digital assets offer a unique combination of high potential returns and low correlation to traditional asset classes like stocks and bonds.
In a world where central banks are printing money at an unprecedented pace, and traditional asset values are being inflated; as a result, digital assets offer a store of value that is not subject to the same forces. As a result, institutional investors are turning to digital assets to hedge against inflation and secure their investment portfolios. Hence, look at Talos.
What are Digital Assets?
Before diving into how institutional investors use digital assets, it’s essential to understand what digital assets are. In short, digital assets are any digital file that has value. This can include everything from cryptocurrency tokens to digital art files.
One of the most popular types of digital assets is cryptocurrency. A cryptocurrency is a decentralized currency that uses cryptography to secure transactions and prevent counterfeiting.
Bitcoin, the first and most well-known cryptocurrency, was created in 2009 in response to the global financial crisis. Since then, thousands of other cryptocurrencies have been created with various features and purposes.
Ethereum, for example, is a decentralized platform that runs smart contracts; Litecoin is a faster and more lightweight version of Bitcoin, and XRP is explicitly designed for use by financial institutions. But, regardless of their differences, all cryptocurrencies share one key feature: they’re not controlled by any central authority like a government or bank.
Why Are Institutions Investing in Digital Assets?
There are three main reasons institutional investors turn to digital assets: potential returns, inflation hedging, and diversification.
When it comes to potential returns, few asset classes can match cryptos. Bitcoin, for example, has seen its price increase by over 1,000% in the past year alone. And while crypto prices are notoriously volatile, the overall trend seems to be steady growth as more and more people adopt these new technologies.
Inflation hedging is another crucial reason institutional investors invest in digital assets. With central banks around the world printing money at an unprecedented pace, traditional asset values are inflated. This erodes the purchasing power of investments denominated in fiat currencies like the US dollar or Euro.
Digital assets offer a store of value that is not subject to the same forces since central banks or governments do not control them. This makes them an attractive option for institutional investors looking to protect their portfolios from inflationary pressures.
Lastly, institutional investors are also using digital assets to diversify their portfolios beyond traditional asset classes like stocks and bonds. While there’s no single answer as to why this is the case, it’s likely due in part to the low correlation between cryptos and other asset classes.