The Institutionalization of Crypto and What That Means for Fund Managers

For years, digital assets occupied a gray area in institutional investing. Even those with exposure often framed it as an experiment rather than a strategic allocation. The prevailing mindset was: If you’re investing in crypto, you better have a damn good reason for it.

Fast forward to today: the recent crypto buzz seems to be more than just market noise. It’s a shift in perception that has been reinforced by regulatory clarity and major institutional players stepping in, as well as the development of more sophisticated investment vehicles.

As more institutional products emerge and regulatory frameworks solidify, there’s an expectation that professional investors should, at the very least, have an informed perspective on crypto investments. The question that emerges isn’t whether digital currencies will replace traditional assets, but rather whether fund managers can afford to ignore a market that has reached meaningful scale and credibility.

Approaching Crypto Risk

With market risk remaining the defining characteristic of crypto investing, skepticism is still warranted. Crypto markets remain volatile, liquidity varies by asset, and regulatory uncertainty persists in some jurisdictions. For firms considering exposure, a structured risk management approach is a non-negotiable.

While the asset class has matured, volatility is still significantly higher than in traditional markets. Bitcoin, for instance, has historically exhibited annualized volatility levels exceeding 70%—compared to around 15%-20% for equities. However, recent shifts in correlation patterns suggest that crypto’s relationship with traditional assets may be evolving.

For years, crypto moved in lockstep with high-growth tech stocks, particularly during periods of liquidity expansion, but as more institutional players enter the space and new investment products emerge, that dynamic seems to be changing. Some data suggests that Bitcoin’s correlation with equities has been declining, prompting a fresh discussion on its role as a portfolio diversifier. That said, the case for crypto as a risk-off asset is far from proven—especially in stress scenarios where liquidity can dry up rapidly.

Liquidity is another key variable. Crypto markets operate 24/7, but execution quality varies significantly across venues. Bitcoin ETFs, for instance, provide regulatory clarity and ease of access but come with their own liquidity constraints, particularly in extreme market conditions.

Another thing to consider from a risk perspective is that crypto exposure doesn’t have to be all-or-nothing. There are multiple avenues for participation, depending on the risk appetite and operational capabilities of each investor.

Direct exposure would involve holding cryptocurrency on balance sheets or engaging in staking to generate yield, offering a straightforward but more volatile way to participate in the market. Indirect exposure through ETFs, tokenized funds, and structured products provides a more traditional investment pathway while mitigating some of the operational and security risks associated with direct ownership.

From Justifying Investment to Justifying Avoidance

Even just a couple years ago, ignoring crypto would have been considered a neutral stance. Today, it’s an active decision that requires justification. The most sophisticated institutional investors aren’t necessarily going all-in on digital assets, but they are taking the time to develop a viewpoint.

Major asset managers and allocators are actively exploring digital assets, and regulatory clarity is improving. And since allocators are asking questions, you need to be ready to give an answer.

This doesn’t mean every fund manager should rush to allocate – but it does mean that they need to be able to engage with the conversation. Whether you’re investing in digital assets or choosing to avoid them, the key is having a position you can stand behind—one that’s rooted in research, risk management, and a clear investment philosophy.

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Kevin Becker is a Co-Founder and CEO of Kiski. Connect with him on LinkedIn here.