Institutional Investors Flock to Crypto Amid US Debt Growth, KPMG Observes

• A recent report by KPMG revealed that Canadian institutional investors are getting more interested in cryptocurrency assets as a safeguard against economic uncertainties. 

• The KPMG study indicates that Canada’s proactive regulatory environment is the main factor attracting institutional interest to crypto assets.

Canadian institutional investors have expanded their presence in crypto as a hedge against economic uncertainties, according to a recent KPMG report. The study points to a significant increase in exposure to crypto among financial services providers and institutional investors in Canada, which exemplifies the increasing tendency to welcome digital currencies in a volatile environment with the degradation of fiat currencies and inflation.

Regulatory Support and Market Dynamics

The study conducted by KPMG indicates Canada’s regulatory regime as one of the key drivers of institutional focus on digital currencies. The country has embraced a regulatory framework that is intended to accelerate the adoption of crypto assets.

This is evidenced by the recent approval of Bitcoin and Ethereum ETFs and sophisticated investment strategies involving derivatives and Ethereum staking. Regulatory measures, along with the increase in the prices of crypto assets, have added confidence to the investors, and institutions are flowing in.

In Canada, institutions are increasingly adopting crypto assets as a refuge from the weakening of local currencies owing to the ballooning US government debt and inflation. According to Kunal Bhasin, partner and co-leader of KPMG in Canada’s Digital Assets practice, a number of economic variables play a role in the recent rise of cryptocurrency.

Institutional investors and financial services providers are attracted to alternative asset classes that safeguard their wealth against currency devaluation or act as a store of values, thus diversifying their crypto-asset portfolios.

Survey Findings and Market Outlook

The survey results of KPMG highlight the increasing popularity of crypto assets in the Canadian investment community. By 2023, 50% of financial service providers polled were providing crypto asset services in the country, representing a significant increase from 41% in 2021. In addition, 39% of Canadian institutional investors said they had crypto exposure in 2023 compared to 31% in 2021.

The direction of crypto adoption has changed due to people’s attitudes towards digital assets as mainstream investment options and the need for valid hedging instruments for an unpredictable economy.

According to the survey, forces like increasing inflation and mounting U.S. debts have triggered the cryptocurrency rally witnessed in 2023. Because of the economic uncertainties, institutional investors are looking at other asset classes that act as a hedge against debasement and are stable stores of value. This change in investment activity is a response to a desire for diversification and risk control in unpredictable market behavior.

In particular, the interest of institutional investors in crypto derivatives products has increased significantly as 42% of surveyed firms now report exposure to these instruments, although only 14% did so previously. Additionally, almost two-thirds of institutional investors with exposure to cryptos are participating in the crypto-related public equity space, indicating increasing interest in investment opportunities within the crypto ecosystem.

Institutional participation in the cryptocurrency market, especially in Bitcoin, has largely changed in the last few years. While in the past, it was perceived with disdain Bitcoin is being adopted more and more by standard financial organizations, corporate treasuries, and asset managers. This change is caused by several factors, such as the function of Bitcoin as a hedge against economic uncertainty and its legitimacy as a financial asset category.