In 2023, institutional investors showed a cautious stance, largely shunning the more speculative and volatile segments of the crypto market, such as memecoins, AI tokens, and BRC-20 tokens.

According to the latest findings from Bybit, there’s a noticeable trend among institutional investors gravitating towards Bitcoin and Ether, allocating about 40% of their portfolio to each of these leading cryptocurrencies as of the end of January 2024. These investors have reserved 15% for stablecoins and a mere 5% for a mix of alternative cryptocurrencies.

Bybit’s analysis highlights a significant shift towards a more concentrated investment strategy among institutions, with their crypto asset allocation intensifying from 50% to 80% in recent months.

Conversely, retail investors have demonstrated a diversified approach, with Bitcoin and Ether making up approximately 35% of their portfolio by January 31, 2024. This group tends to explore more within the altcoin sector and maintains a higher percentage in stablecoins, reflecting a broader investment palette and a preference for liquidity.

Institutions Exhibit a Growing Preference for Ether Over Bitcoin

Bybit’s report also points out a pronounced inclination among institutions towards Ether, marking a notable increase in their investment in Ether starting from September 2023 and peaking around January 2024 to about 40%.

Ether has emerged as the dominant asset in institutional portfolios as of January 31, 2024, with institutions betting on the anticipated benefits of Ethereum’s Dencun upgrade. This optimism stems from the potential improvements the upgrade is expected to bring, especially after Ether’s less stellar performance in 2023.

The Dencun upgrade, set for March 2024, is aimed at cutting down transaction fees on Layer 2 networks through “proto-dank sharding.” Although it might not create as significant an impact as the Merge did, its success is foreseen to bolster Ether and Layer 2 tokens alike.

The market also harbors hope for the SEC’s approval of a spot Ether ETF by the year’s end.

Institutions Show Caution Towards Layer 2 Investments

Despite the growing importance of Layer 2 solutions, institutional investors’ allocations reflect a cautious or skeptical outlook on L2s, especially with the upcoming Dencun upgrade for Ethereum.

Institutions seem more optimistic about Layer 1 technologies, as evident from their altcoin portfolio choices. This perspective suggests an expectation that the fee reductions on L2 might initially diminish revenues for these networks. However, the long-term view is that it could endow them with a competitive edge by improving margins, as explained by Bybit. The advancements in zkEVM technology, like those achieved by Polygon’s zkEVM achieving Type 1 status, further this sentiment.

Although institutional portfolios indicate a bullish stance on Layer 1 assets, there’s been a noted decrease in the dollar value of these assets held, albeit less significantly than the decline observed in Layer 2 assets.

In spite of the attractive returns in 2023, institutional players have consciously avoided engaging in high-risk, high-reward investments throughout the year, particularly distancing themselves from volatile segments like meme coins, AI tokens, and BRC-20 tokens, except for some investments in L1, DeFi, and metaverse tokens.

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