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A point of no return? Investment products in cryptocurrencies can be key to mass adoption

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Cryptocurrency investment seems like an important and accurate choice for mass adoption.


The first exchange-traded Bitcoin (BTC) futures fund was launched in the United States on October 19, 2021. Since then, a number of other cryptocurrency investment products have been launched in various markets. That first ETF, the ProShares Bitcoin Strategy ETF, quickly became one of the best trading ETFs of all time when it debuted, and soon several other Bitcoin futures were launched in the United States, offering investors a wide range of investment options.

For Martha Reyes, head of research at cryptocurrency trading platform Bequant, this opportunity is significant. Reyes pointed out that ETFs have proven very popular in traditional finance "in recent years, with ETF assets estimated to reach $14 trillion by 2024. Reyes said that investors who have been on the edge of the market can now choose to invest in cryptocurrencies if they "prefer the low prices, flexibility and convenience [of ETFs], especially since they no longer have to hold cryptocurrencies alone." " .

Holding crypto assets, Reyes said, could be a "technical barrier for some non-crypto currencies". The emergence of crypto ETFs can offer investors the kind of diversification they want in their portfolios through cryptocurrencies, although some may wish to access the market "through baskets that reflect different trends in this fast-growing market". He added: "Others prefer to have more hands or a combination of strategies. What matters is that investors have options."

In fact, several options have been released in recent weeks. US company WisdomTree has announced a cryptocurrency exchange (ETP), Crypto Mega cap Equal Weight ETP, on the Euronext stock exchange in Paris and Amsterdam.

Also read: The most shocking cryptocurrency scam of 2021

Product and investment acceptance

For Reyes, participation in these investment products has so far been "mostly institutional", especially in countries like the United States, where only futures are traded. He said retail investors were "aware of the added cost of converting a future into a spot ETF, which means underperforming the bottom line". Reyes added that for "broad retail exposure, we may need to look at spot products."

Sui Chung, CEO of CFA regulated cryptocurrency provider CF Benchmarks, said that cryptocurrency investment products are “an important driver of mass adoption” and although the company would like to see its wider reach be significant: “We should not underestimate the impact of this product in attracting new investors and capital to crypto assets, and how this can accelerate long-term adoption.

Karan Sud, CEO and Managing Director of Cboe Vest, an asset management partner of Cboe Global Markets, said that greater participation from various investors is "good for the market" as it increases liquidity and builds market infrastructure. The court said investors should carefully consider their options before investing, as some products were initially launched to give investors access to the cryptocurrency market while others "try to cope with Bitcoin's extreme volatility".

According to South, volatility is “endemic to the crypto asset space” and sell-offs in which Bitcoin and other crypto assets lose more than half of their value are fairly common, so drops of more than 20% are expected. He added: “What is new, however, is the availability of funds that allow investors to gain access to Bitcoin exposure using a strategy designed to mitigate the impact of a severe and persistent downturn.”

The fund, he said, takes “a number of managed volatility investment strategies widely used in traditional asset classes” and applies them to bitcoin futures to protect investors from cryptocurrency volatility. This instability is believed to be holding back some institutional investors and preventing regulators such as the US Securities and Exchange Commission from finding ways to adequately protect investors and adapt to innovation in space.

For Chung, the cryptocurrency market has matured to the point that there are already “core” exchanges like Coinbase and Kraken that guarantee fair trade without manipulation, so market manipulation should not be a problem. However, for more conservative institutions and investors, regulated products are preferred. Given the lack of Bitcoin ETF spots in the US and the shortage of futures-based products mentioned by Reyes above, retail investors are left to gain exposure to other markets or to buy the cryptocurrency outright. However, this option is not optimal for some people.

Products are traded under the ticker MEGA, are backed by physical cryptocurrencies, including Bitcoin and Ether (ETH), and are rebalanced every three months. WisdomTree also launched the WisdomTree Crypto Market (BLOC) and WisdomTree Crypto Altcoin (WALT) ETP in Europe. Bitcoin Capital AG also launched two ETPs on the SIX Swiss Exchange in December, offering investors exposure to Bitcoin and Ether. These products are actively managed by FICAS AG and are available to institutional, professional and private investors.

These products have been successful so far and further options are released regularly, which effectively increases the opportunities for investors in the market. For some experts, this product is part of the next step that cryptocurrencies need to take to spread.

Initial stage for crypto investment products

Buying cryptocurrencies on the spot market has become a key strategy for most crypto investors in recent years, but more conservative investors looking to diversify their portfolio may feel uncomfortable with the lack of market regulation. As Sood of Cboe Vest puts it, "there is less regulation compared to the existing trading and custodial infrastructure for conventional assets such as stocks, bonds and funds." This lack of regulation "examples the constant news of key loss, system hacks, and cryptocurrency scams".

Bitcoin futures investment products operate according to the terms of the commodity futures trading commission, while bitcoin-exposed mutual funds are actively managed by regulated companies that always provide strong investor protection. Taking these differences into account, Sood points out that "unless there is a change in spot bitcoin regulation, there is a solid basis for BTC futures-based investments, but not spot-based investments."

Spot Bitcoin ETFs in particular are available in various jurisdictions. In December, Fidelity Canada launched one product called the Fidelity Advantage Bitcoin ETF. It is traded on the Toronto Stock Exchange and is denominated in Canadian and US dollars. The court said US regulations could burden investment product manufacturers but had "provided US investors significant value and protection over the years." These safeguards, he said, "have been tried and tested for decades," and as such, investors should opt for domestically regulated products whenever possible.

While futures-based investment products may not be optimal for retail investors, according to Sood, several advanced products have been launched to give investors the cryptocurrency exposure they can seek. He concluded: "Investing in funds overseas can expose US investors to unique risks and an unjustifiable tax burden."

Reyes from Bequant points out that cryptocurrency ETFs have less than $20 billion in assets under management across 50 products, meaning we are “still in the early stages of launching” those products. However, approval of futures ETFs and rejection of spot ETFs is considered "inconsistent", because spot ETFs are already traded in other jurisdictions. Worse, futures products are very profitable for institutional investors, because they are too expensive for private investors.

Specifically, Grayscale Investments responded to the SEC by rejecting VanEck's proper application of the Bitcoin ETF and issuing a letter saying the SEC wrongly rejected the product after approving several futures Bitcoin ETFs. Sui Chung, CEO of CF Benchmarks, said that while futures are a regulated instrument overseen by the CFTC, this is "not so clear on the ground with Bitcoin" and the SEC is being challenged to align its enforcement mandate with investors' wishes. harmony.

However, Chung noted that the Bitcoin futures ETF has "triggered irreversible change" because it is available to "any member of the public who invests in the world's deepest capital market". The market, he said, has not seen any significant disruption and "the sky has not fallen" meaning we have passed the "point of no return." For Chung, companies that can offer ETFs to investors who can diversify and grow their portfolios will “win”.

Make crypto more accessible

Bitcoin Spot ETFs can make cryptocurrencies more accessible, but for the experts mentioned above, crypto ETFs are more than just a product with physical exposure – it's about making cryptocurrency exposure more accessible. For Reyes, trading ETF futures in the US is "a test case for a possible spot ETF approval". Such an ETF, he concluded, would be very useful:

“The Bitcoin Spot ETF will drive Bitcoin retail adoption further. Some investors prefer easy market access in this way rather than through specialized cryptocurrencies. Reyes welcomed the regulation, noting that the crypto fiat ramp is more regulated as the platform can help signal those regulatory issues are being addressed, further fueling demand for cryptocurrencies.

Chung says that cryptocurrency investment products can lead to mass adoption to ensure investors experience less friction when entering the market, as it may be easier to buy ETP through an existing brokerage account than opening an account on a cryptocurrency trading platform: "We don't want to be dogmatic about how people invest and learn about cryptocurrencies and their potential. Our job is simply to open up as many opportunities as possible and encourage acceptance."

While it's unclear when the SEC will approve a spot ETF for Bitcoin or whether existing solutions for more conservative investors will be enough to make the move, the new investment product makes it easier for investors to get involved in the space.    Over time, the trend should continue and new products will emerge that will allow cryptocurrencies to fully emerge as a new asset class in the market that can help hedge against inflation or economic downturn.

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