Middle Eastern investors see digital assets as opportunity to diversify, survey finds

Overwhelming majority of regional investors polled want digital assets to be combined with other traditional asset classes

Cryptocurrency exchange data is monitored. Photo: EPA

The majority of professional investors in the Middle East consider digital assets to be a major part of the investment landscape, according to a global survey by Laser Digital, the cryptocurrency arm of Japanese bank Nomura.

About 93 per cent of the Middle East respondents consider digital assets as an opportunity to diversify investment, alongside traditional asset classes such as fixed income, cash, equities and commodities.

The survey “reveals that the majority of institutional investors surveyed saw a clear role for digital assets in the investment management landscape, and the benefits they can bring, such as greater diversification of portfolios,” Jez Mohideen, chief executive of Laser Digital, said.

“For many, their outlook for major digital assets such as Bitcoin and Ethereum is positive.”

Interest in the digital asset industry eased towards the end of last year after a global crisis that resulted in the collapse of one of the world's biggest cryptocurrency exchanges by trade value, FTX, and several others.

This eroded investor confidence globally as some questioned regulations, transparency and the future of digital assets as a whole.

However, financial services regulators in the region and globally are developing a framework to maintain a balanced oversight of the cryptocurrency industry and digital asset space.

The digital asset market is currently recording strong growth, with major cryptocurrencies Bitcoin and Ethereum up by as much as 69 per cent from January to April. The global market capitalisation of cryptocurrencies has climbed to about $1.2 trillion, having started this year at below $800 billion, according to Laser Digital.

Nomura's Laser Digital said it commissioned an independent global survey with professional investors who collectively manage about $4.956 trillion in assets at pension funds, wealth management firms, family offices, hedge funds, investment funds, insurance asset management and sovereign wealth funds.

They work in Europe, the Middle East, the US, China, Hong Kong, Singapore, South Africa and Brazil covering the major financial centres with various approaches to the digital assets sector.

Of these, 30 survey responses were from professional investors in the Middle East who collectively manage $207.75 billion.

Nine out of 10 of these regional investors want to see digital assets combined with other traditional asset classes to produce “all-weather” income strategies to address the risk of inflation and risk of fiat currencies such as gold or silver losing their value.

Six in seven of the Middle East respondents are positive about the digital asset class generally, and Bitcoin and Ethereum particularly, over the next 12 months, the survey showed.

About 56 per cent see Bitcoin and Ethereum as “providing a foundation of the Web 3.0 economy”, representing a long-lasting source of investment opportunities. However, 27 per cent believe they are highly speculative assets.

Web3 is the emerging third generation of the World Wide Web, with blockchain, decentralisation, openness and greater user utility among its core components.

Beyond Bitcoin and Ethereum, 83 per cent of those questioned see value in being exposed to other carefully chosen cryptocurrencies. Only 17 per cent did not see the value in expanding into other cryptocurrencies.

More than three-quarters of the regional investors say that they or their clients are currently considering investing in digital assets, the survey showed.

Some 43 per cent say their and/or their clients’ total percentage exposure to digital assets will be between 5 per cent and 10 per cent over the next three years.

However, 87 per cent of the 30 Middle East respondents highlighted the importance of having a large traditional financial institution backing any digital asset fund or investment vehicle before they or their clients consider allocating it money.

Currently, they have a wide range of maximum allocations to digital assets under their risk boundaries, with 37 per cent of those surveyed saying they can invest up to 4 per cent, while 27 per cent can invest up to 5 per cent in these assets.

Sector challenges

Looking at the challenges of digital asset investments, 94 per cent of investors in the Middle East said there are legal or regulatory restrictions applicable to them that could prevent their fund or clients from investing in a product that has exposure to digital assets.

Most would have to make regulatory filings or notifications as a result of holding or investing in financial instruments focused on digital assets, the survey showed.

Nine in 10 respondents cited this as an issue, while 10 per cent were confident they would not need to make regulatory filings or notifications.

“Many of our survey respondents acknowledged that there are legal and regulatory restrictions that could prevent them from investing in digital assets, and these need to be addressed by the industry in co-operation with regulatory authorities,” Mr Mohideen said.

Global outlook

Globally, 82 per cent of professional investors surveyed in 21 countries are positive about the digital asset class in general, and Bitcoin and Ethereum in particular, over the next 12 months. Just 3 per cent of respondents are negative about the outlook for the sector, while 15 per cent are neutral.

“The strong start to the year in the digital asset space with Bitcoin turning out to the best-performing asset class in the first quarter of 2023 might be dismissed as another burst of optimism. Crypto sceptics might be entitled to point at the previous year and the well-documented difficulties in the sector,” the report said.

However, the study shows “the sector has more than just a few months of optimism to rely on,” it said.

The optimism extends beyond the year ahead with 45 per cent saying their and/or their clients’ total percentage exposure to digital assets will be between 5 per cent and 10 per cent over the next three years, indicating a “sustained and growing appetite for investment,” the report said.

This is because the crisis in the industry has prompted major global regulators to take a more “proactive approach” in addressing some of the issues facing the digital asset sector, putting more robust infrastructure and rules in place, it said.

“Digital assets may still to some extent be highly speculative and making predictions about future prices may still be challenging but professional investors appear to be committed for the short and longer term,” it said.