Digital Assets: The Next Frontier for Markets and Investors

Since 2008, digital assets have captured investor interest and grown at an astounding pace. And with recent advancements in AI and other disruptive technologies, the digital asset industry continues to propel financial innovation forward. Keep reading to discover the emerging opportunities and strategies unfolding.

Bitcoin. Ethereum. Tokenization. Mining. Staking. Blockchain technology.

Today, it’s common to hear these words in the news and financial discussions. But if you’re not immersed in the digital asset ecosystem, these terms can quickly become overwhelming. And it’s understandable, given the novelty and technical complexity of these assets and technologies.

To simplify the digital asset marketplace and its investment possibilities, we’ve compiled this concise explainer that covers what digital assets are, how they’ve evolved, what’s propelling the market, how to gain exposure, and why you might choose to use them in a portfolio.

Digital Assets: Understanding the Building Blocks of the Future

Knowledge generally precedes better outcomes. With that in mind, it’s important to understand the foundations of financial digital assets before you can effectively integrate them into an investment strategy.

What Is a Digital Asset?

The term “digital asset” is universally recognized, yet it’s still ambiguous and contextual. Owning digital assets can have a vast number of implications depending on the type and purpose of the asset.

That’s because digital assets are incredibly diverse. They can serve as mediums of exchange, stores of value, or proof of ownership. They can grant voting rights, provide anonymity, or even generate yield. And, unlike traditional financial instruments, digital assets are purely virtual and supported by a decentralized ledger known as a blockchain.

Blockchain technology is hailed as one of the most disruptive technologies of all time. Its capabilities — such as decentralization, immutability, programmability and transparency — enable a host of applications across the private and public sectors, including finance, healthcare, insurance, supply chain, media, law, and others.

Digital Asset Examples and Types

While there aren’t standardized parameters for defining digital assets, it’s easiest to group them into the following categories:

The History of Digital Assets

In many ways, digital assets are still a novel concept — but the underlying mechanisms that support their capabilities date back to the 1970s.

Figure 1: Timeline of Digital Asset Evolution

Why Now? The Budding Promise of Digital Assets

Although they are relatively young compared to traditional and more familiar financial instruments, digital assets have experienced explosive growth in a short span of time — similar to the internet’s exponential adoption in the 1990s.

Perhaps most importantly, these assets continue to overcome regulatory hurdles (such as custodial services, tax reporting, and fund inclusion), paving the way for broader use and portfolio integration. Several catalysts illustrate why the momentum is undeniable.

The Driving Forces Behind Digital Asset Growth

And now, the door is open for additional innovation and integration of digital assets with traditional investment vehicles. But why should investors consider stepping through that door?

The Case for Investing in Digital Assets

Notable tailwinds are picking up and making a compelling case for investing in digital assets.

Diversification and New Investment Opportunities

Over the past six years, equities have exhibited an unusually high correlation with bonds (0.61),¹³ prompting many investors to seek new avenues for diversification.

Tokenized assets, particularly those tied to alternative funds, are emerging as a promising diversification strategy. According to EY’s survey of institutional investors, 65% of respondents identified the diversification benefits of tokenized assets as their primary appeal, while 58% highlighted the opportunity to access new asset types.¹⁴

Historically, asset managers have focused on tokenizing money market funds and Treasurys. The tides may be shifting though — 53% are now focused on tokenized alternative funds.¹⁵ Tokenized assets may not only enhance portfolio diversification, but also continue democratizing access to traditionally illiquid and exclusive markets.

Risk and Return Characteristics

Dating back to the first block of mined bitcoin, cryptocurrencies have been widely associated with speculation and volatility. This is unsurprising for an asset class that’s already featured several booms and busts in its brief history. Even so, bitcoin’s 30-day realized volatility has steadily trended downward over the last seven years (Figure 2).

To put bitcoin’s risk profile into perspective, it helps to view the world’s largest cryptocurrency alongside some of the world’s largest stocks. When analyzing the one-year volatility of the Magnificent Seven, bitcoin falls squarely in the mix, between Meta and Amazon (Figure 3).

Moreover, institutional sentiment toward cryptocurrencies is shifting. A Coinbase survey determined that institutional investors rank cryptocurrencies as the third-best asset class for generating attractive risk-adjusted returns over the next three years, trailing only US private and public equities (Figure 4).

Institutional Investor Involvement

Arguably the most significant accelerant behind the recent — and future — adoption of financial digital assets is the increasing involvement of institutional investors. Newly approved products, like digital asset ETFs, are behind the recent momentum.

As a result, concerns around regulatory uncertainty are beginning to fade; 62% of institutional investors expressed a preference for gaining exposure to crypto through registered vehicles, where the underlying asset is cryptocurrency, rather than acquiring spot crypto directly.¹⁶ Furthermore, in the next two to three years, 51% plan to make investments in ETPs and mutual funds that hold blockchain-related companies.

Market Maturation

Cryptocurrencies themselves are not new, nor are ETFs as an investment vehicle. However, the ability to gain crypto exposure through an ETF wrapper is a novel concept that has already driven sizable inflows. Year-to-date bitcoin ETF inflows reached $17.5 billion through August 30, 2024; in that same timeframe, the issuance of bitcoin has mirrored these inflows, increasing to $6.2 billion (Figure 5).

This development could have long-term implications and eventually pan out to be a watershed moment, laying the groundwork for additional funds that offer a wider assortment of crypto assets. And while it’s still early in the adoption cycle for digital assets and blockchain technology, artificial intelligence (AI) should accelerate growth exponentially.

The Role of Digital Assets in a Portfolio

To date, digital assets have played a speculative role in most portfolios, but there are signs of stabilization. For most investors, digital assets would comprise only a small portion of a well-diversified portfolio, with the goal of complementing core holdings and possibly improving its overall performance.

Here are some of the potential roles digital assets can play.

Enhancing Portfolio Diversification and Resilience

Cryptocurrencies like bitcoin and ether have exhibited lower correlations with traditional asset classes such as stocks, bonds, and real estate. This may help hedge against market-specific downturns, potentially increasing portfolio resilience while helping reduce overall susceptibility to price fluctuations.

Managing Impacts of Inflation and Monetary Policy

In an environment of increasing money supply, inflation is a prevalent, ongoing concern. By holding bitcoin and other digital assets, investors may be able to strategically offset the impacts of inflation in a portfolio. Unlike fiat currencies, bitcoin cannot be endlessly printed or mined — it has a capped supply of 21 million coins. This built-in scarcity has helped bitcoin earn the nickname “digital gold,” with many investors viewing it as a deflationary asset and dependable store of value. Like gold, bitcoin has exhibited a negative correlation with the US dollar since 2018.²¹

Accessing New Markets

Certain markets and asset classes, such as private equity and credit, have ordinarily been reserved for a smaller subset of wealthy individuals and institutional investors. Digital assets are challenging that norm, democratizing access to previously inaccessible or illiquid investment opportunities.

Through tokenization, assets like real estate, art, and even venture capital can be fractionally owned and traded on global platforms. For instance, certain platforms tokenize equity in startups, enabling a broader range of investors to invest in early-stage companies alongside traditional VCs.²²

Participating in Emerging Technologies

Blockchain, smart contracts, tokenization — these are undoubtedly some of the most cutting-edge and innovative concepts of the 21st century. Investors can likely expect an increasing number of funds will offer exposure to these technologies, which are disrupting industries and creating entirely new markets in the process.

For example, Ethereum’s blockchain supports a self-contained ecosystem of DApps, revolutionizing sectors like healthcare. Patient data, for instance, is prone to data breaches and corruption; blockchain can help not only improve patient data security but also prevent counterfeit pharmaceuticals and streamline clinical trials, thanks to an immutable and timely authentication process.

Positioning for Long-term Growth

In the last five years, the total crypto market cap has increased nearly 762%, from $245.4 billion to over $2 trillion.²³ No one can promise that level of return going forward, but innovation tends to go hand in hand with long-term performance, historically.

Digital assets are rapidly evolving and increasingly integrating into the investment ecosystem. Investors with a long-term outlook may be able to position their portfolios to ride the coattails of this asset class’s maturation and advancement. To manage risk and volatility, though, it’s important to balance digital assets with more stable, conventional investments as well.

Gaining Satellite Exposures

Investors with traditional, lower-risk portfolios can leverage digital assets as a satellite allocation. This strategy allows investors to complement their core holdings with the potential upside of digital assets — either directly or indirectly — without disproportionately increasing their portfolio’s overall risk exposure.

How to Access Digital Assets and Deploy Them in a Portfolio

Just as there are many different types of digital assets, there are many ways to gain exposure to this unique class of investments.

Practical Considerations for Investors

Popularity does not imply simplicity — digital assets present unique risks and challenges. And so, it’s imperative for investors to perform due diligence and research before stepping into this market. We’ve shared some practical considerations to keep in mind during the process.

Due Diligence and Research

Whether you plan to buy digital assets directly or gain indirect exposure through funds, the investment adage stands: know what you own and know why you own it.

Understanding the differences between crypto versus blockchain is just the beginning. Investors must deepen their understanding and determine a valid investment case for each asset. To help you conduct due diligence, consider the following questions:

• What is the asset’s historical performance?
• How has it performed in different market conditions (e.g., bull vs. bear markets)?
• What are the growth drivers for this market?
• Who are the founders and key team members behind the digital asset? What are their backgrounds, credentials, and track record in the industry?
• What is the underlying technology? And does it solve a real problem or offer a unique value proposition?
• Who are the main competitors and/or what are the alternatives to this digital asset?
• Are there any red flags, such as unresolved legal issues or regulatory concerns?

It’s also vital to weigh the portfolio implications of the digital assets you target.

• Does this align with my risk tolerance? 
• What is my investment horizon for this asset? 
• How does this incorporate into my portfolio?
• How liquid is this asset?

Digital Asset Risks

All investments involve some level of risk. Digital assets are no different. Here are a few that are common with this asset class.

• Volatility: Although their volatility has declined in recent months, digital assets are still prone to dramatic price swings. Consequently, while investor portfolios may experience significant gains, they could also suffer substantial losses, emphasizing the need for a clear understanding of risk tolerance and proper asset allocation.
• Liquidity: Major cryptocurrencies like bitcoin and ether can generally be traded quickly and within a reasonably tight spread.²⁸ However, new or lesser-known digital assets may be less liquid and, therefore, difficult to buy or sell in real time, especially during periods of market stress.
• Cybersecurity: Digital assets are inherently susceptible to cybersecurity risks. Market manipulation, pump-and-dump schemes, rug pulls, hacking, and fraud can result in the loss of assets, necessitating the use of secure, reputable exchanges and platforms.
• Knowledge and Accessibility Gaps: Digital assets (and their underlying technology) aren’t exactly straightforward. Investing in these assets without the required knowledge can lead to poor investment choices and increased vulnerability to scams. Moreover, the accessibility of digital assets varies across different regions and platforms, meaning some investors may face legal or logistical barriers to entry.

The Age of Digital Assets Is Only Beginning

For investors seeking to position themselves at the forefront of financial innovation, digital assets may present a compelling case, especially as the market continues to mature.

The increasing involvement of institutional investors, coupled with the advent of a regulatory framework, suggests that digital assets are gradually evolving from speculative instruments into a legitimate asset class — one that offers unique opportunities for diversification, potentially outsized risk-adjusted returns, and greater access to previously illiquid markets.

Frequently Asked Questions