As institutional interest in digital assets accelerates, the conversation is shifting from whether to invest in crypto to how to do it responsibly. Joining us is Karl Naim, Group Chief Commercial Officer and CEO of Middle East for XBTO, to discuss the evolving role of digital assets in institutional portfolios and why a modest Bitcoin allocation could reshape traditional investment strategies. Karl, thanks so much for joining us today.
Thanks for having me.
Now, you have been very vocal about bridging traditional finance with digital assets. What exactly does that look like within your role at XBTO?
It's a very interesting question. On a day-to-day basis, it's really about applying the same discipline you would apply to any other traditional asset class — things like custody, execution, and risk frameworks — and putting a quantitative analysis on top of that. Because the question we usually get today from institutional investors is not should we invest, but how do we invest and how do we allocate. And more importantly, it's not a standalone conversation about digital assets, but how they fit into an overall portfolio alongside fixed income, equities, and other traditional asset classes.
And I know that one of the things that kept institutional investors on the sidelines for a while was unclear regulation. You've been very vocal about how that has been advancing — clear regulation, bridging the knowledge gap, institutional-grade infrastructure. Which of these three do you still see as the biggest bottleneck today?
I'll start with what isn't a bottleneck. In our view, infrastructure is no longer the issue. The institutional-grade offering for custody and execution is there and would meet any standard third-party due diligence that an institutional investor would conduct. That's reflected by the fact that the likes of Standard Chartered and BNY Mellon are now offering that institutional-grade infrastructure, which gives investors more comfort. Regulation — especially in ADGM and Bermuda, where we're regulated — is already there too. It's forward-looking, and it's one of the reasons so many digital asset firms are coming to the region.
What I think is still the bottleneck today is the knowledge gap, most often at the investment committee level. An investment committee is not yet fully comfortable with this asset class — how to allocate to it, how much to allocate, how to benchmark a manager. Another bottleneck is the size of the industry when it comes to active management beyond beta exposure. There's liquidity on the ETFs, but for active managers, the fund sizes aren't there yet. If you're talking about institutional allocators putting in $50 to $100 million, you need funds that are $1 billion-plus — and today, the regulated managers aren't yet large enough to absorb that demand.
So let's talk about sizing. You've said the ideal range is 1 to 5% Bitcoin within a portfolio. Pretend I'm one of these investment committee members who doesn't really know how to invest in this or what impact it would have. What's your argument?
Thankfully we're not the only ones saying 1 to 5% — that's the number most people in the industry are landing on. The way we look at it, even through backtesting and forward-looking Monte Carlo simulations we run for institutional investors, the number comes out at 3 to 5%. The impact is actually quite simple. If you look at a traditional 60/40 portfolio — 60% equities, 40% fixed income — over the last 5 to 10 years, you'd be looking at around 9% annualized returns with a Sharpe ratio of 0.8. If you include up to 5% Bitcoin in that same portfolio, both backward-looking and through Monte Carlo simulation, you're looking at a 12% return with a 0.9 Sharpe ratio. So you improve your return and your risk-return profile. That's the sweet spot — big enough to matter, but not so big that it generates excessive volatility.
Because I think that's often one of the concerns — Bitcoin is a volatile asset, and people worry it would make the portfolio more volatile.
It does to some extent, but again, when you look at the Sharpe ratio, it actually improves the overall risk-return profile of the portfolio.
Just a couple more questions. You mentioned beta exposure — the first meaningful wave of institutional adoption came through ETFs. What behaviors are you seeing now from institutions that suggest a move beyond beta into active management?
That's a great point. If you look at the digital asset journey over the last two-plus years, the first moment was the ETF launch — the traditional way to access a new market. Every institutional investor understands ETFs. It's issued by a counterparty they trust — in this case BlackRock, with whom they already do business. So that was the first wave: straightforward access using familiar tools.
Now, once you're sitting on an asset class, the next stage is how do you improve its risk-return profile. Today, if you're an institutional investor sitting on cash, you put it in fiduciary deposits, T-bills, or money market funds — you never leave an asset sitting idle. What most institutional investors don't yet realize is that there's a deep derivatives market that allows you to hedge your position or improve the risk-return profile of Bitcoin specifically. So what we're seeing now is allocators asking: I have exposure to this asset — how do I put it to work? How do I reduce the volatility? We're talking 50 to 60% volatility, so the ability to hedge using derivatives and active managers is becoming the conversation. We usually draw the parallel to the hedge fund industry in the late 80s and early 90s — it took time for them to be incorporated into traditional portfolios, but today there is no traditional portfolio without hedge funds. We believe the same will be true for digital assets within a few years.
Final question — you're constantly in conversations with sovereign wealth funds, pension funds, and family offices. What are still some of their concerns, and what gets them over the line to make that first investment?
The infrastructure question still comes up first in those early conversations, even though it's largely resolved. They need to understand what's happening under the hood — who holds the keys, are the assets safe, what happens in a bankruptcy event, and there have unfortunately been several of those in the short history of digital assets.
The second concern is volatility. A 10 to 20% daily or monthly drawdown is difficult to stomach — Bitcoin going from $80,000 to $60,000 in a matter of weeks, for example. So if they get exposure, they need to size it properly and know how to hedge it.
The third is manager due diligence. Once they're comfortable allocating a ticket, they need a regulated player with transparent reporting and monthly NAVs — the traditional finance discipline and risk management approach, rather than managers who talk only about returns without addressing risk. Those are essentially the steps to broader adoption, and that's what we see playing out in our conversations with institutional investors today.
Incredible. Well, thank you so much, Karl, for joining us today. You've been in this region and this space for a while, and it's great that you're front-running this discussion with regulators and investors alike.
Thank you, Rachel.
