Bernstein Still Sees Institutional Adoption Despite Crypto Winter

Asset managers that were actively investing in cryptocurrency markets in the bull market of 2020/21 continue to invest in the sector and remained committed to digital assets, with some planning to allocate more capital to the industry, brokerage firm Bernstein said in a research report Monday.

Private market investors continue to look for opportunities in the sector, although they are "way more valuation sensitive,” the report said. Therefore, “crypto converts” remain active in the sector, but those investors who were ambivalent about digital assets in late 2021 have delayed their plans.

Bernstein says it is seeing select large asset managers continue to build out their digital-assets strategies and expects those initiatives will result in “actual direct digital assets allocations 12-18 months down the line.” It said it also continues to have active conversations with a number of investment managers at different stages of interest in the sector.

"This is probably the most encouraging part of the institutional adoption cycle while recognizing that the actual impact on the market is probably 12 months away,” analysts Gautam Chhugani and Manas Agrawal wrote.

Crypto-native and venture-capital investors raised very large funds in 2021, with some in excess of $1 billion. In contrast, fundraising for “liquid crypto strategies” or tokens have been less than $100 million, the note said. There is intent to “deploy this dry powder in private rounds,” which means that private valuations aren't correcting as much as crypto valuations.

Most investors were surprised by the seamless transition of the Ethereum blockchain to proof-of-stake (Pos), a process known as the Merge, but they were equally surprised that it was a “sell-the-news” event, with weak ether (ETH) price action after the switch, the note added.

The Merge was the first of five software upgrades planned for the Ethereum blockchain and involved the transition from a proof-of-work (PoW) method of validating transactions and securing the network to a more energy-efficient PoS consensus mechanism.

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