6 min läsningBlackRock’s filing of an application to launch a spot bitcoin exchange-traded fund (ETF) in June 2023 was a major development in the cryptocurrency sector. Given BlackRock’s prominence in the global financial system and its track record of issuing ETFs, this show of support is expected to boost demand for crypto- by as much as $30 billion according to one estimate.
While mainstream financial institutions (FIs) bring credibility and expertise to crypto, they also face a range of unfamiliar challenges due to the immaturity of crypto as an asset class and the technology underpinning it. So should investors consider holding products issued by a crypto native instead?
Why Financial Goliaths Jump in Crypto
In a recent interview, BlackRock CEO Larry Fink claimed that launching a spot bitcoin ETF would level the playing field for investors.
‘What we're trying to do is make crypto more democratized and much cheaper…And so, we hope regulators look at these filings as a way to democratize crypto and we'll see in the future how that plays out.’
As the table below shows, BlackRock isn’t the only provider waiting for a response from the US Securities and Exchange Commission (SEC). In fact, many submitted new applications or refiled applications within weeks of BlackRock.
The logic behind this rush to market is clear: growing adoption has led to rising demand for crypto as an asset class and investment products that can sit in a portfolio alongside mainstream holdings.
The problem for most investors is accessing crypto is generally more complex than traditional asset classes:
Buying directly involves signing up with a crypto exchange which may be unregulated or underregulated. This means investors aren’t protected when something goes wrong, as experienced by FTX customers at the end of 2022.
Derivatives - complex financial instruments linked to the value of an underlying asset- offer an alternative way to gain exposure to crypto. But they trade ‘over the counter’ (via broker-dealer networks) or on the Chicago Mercantile Exchange. Neither of these trading venues are convenient for retail investors.
However, exchange-traded products (ETPs) are much more retail-friendly. Like derivatives, they offer exposure to an underlying asset, but they’re transparent. Investors can buy ETPs through mainstream brokers and platforms and hold them in a portfolio alongside traditional investments. Moreover, national or regional financial authorities supervise ETPs, so they’re treated the same as other products on exchanges.
Learn how to be exposed to crypto.
What does this mean for the crypto market?
In terms of the potential market size, gold can provide a useful benchmark, considering bitcoin displays many of the same characteristics as a store of value.
Asset manager State Street launched the first gold-backed ETF, SPDR Gold Shares, in 2004. There was sizeable demand for a product offering exposure to a relatively illiquid asset, and investors responded by pouring in $1 billion within three days. Today, SPDR Gold Shares is the biggest in its sector by some distance, with $55 billion of assets under management (AUM). Incidentally, two BlackRock products also rank in the top ten by AUM.
According to a recent report published by crypto trader NYDIG, the impact of spot bitcoin ETFs on the market could be considerable. Using a formula based on relative volatility, NYDIG predicts that these products could attract $30 billion worth of new demand.
‘In addition to the investor protections afforded to exchange-traded products, the brand recognition of BlackRock and the iShares franchise, familiarity with purchase and sale methods through securities brokers, and simplicity of position reporting, risk measurement, and tax reporting, a spot ETF could bring some noted benefits compared to existing alternatives – better liquidity compared to private funds…and potentially lower costs’.
The Benefits of a Crypto Specialist
Investing in ETFs issued by mainstream FIs, as NYDIG explains, comes with benefits. However, the crypto ecosystem presents several challenges that they don’t face with traditional asset classes:
Regulatory uncertainty - crypto is a relatively new asset class, so regulations constantly evolve and are inconsistent between countries or jurisdictions. For example, the EU’s Markets in Crypto-Assets (MiCA) regulation is one of the most progressive, setting out a region-wide framework covering crypto, issuers and service providers. At the other end of the spectrum, China banned FIs and payment providers from processing crypto transactions in May 2021 and crypto trading four months later.
Infrastructure - blockchain is an immature technology, and changes can directly affect the market. Bitcoin rises when the reward for processing transactions (known as mining) halves, while exploits or hacks have the opposite effect.
Storage - storing crypto is as complex as buying it. The different options offer varying degrees of protection and accessibility: hot wallets (which connect to the internet) are convenient but vulnerable to hackers, whereas cold wallets (which are offline) are more secure but make it harder to access the assets. Exchanges also provide custodial services with contrasting levels of security and reliability.
So investors might want to consider products issued by crypto specialists.
As CoinShares’ CEO Jean-Marie Mognetti recently told media platform DL News:
‘If you want to get heart surgery, do you go to a cardiologist or do you go to your GP?
BlackRock is a bit of a GP, it can service every part of your body to a certain level. After that, they need to refer you to a specialist. For crypto this specialist is CoinShares — we’re laser-focused on crypto.’
CoinShares started as an energy commodity business before pivoting to crypto in 2013. It pioneered the use of crypto ETPs in 2015 by launching Europe’s first issuer, XBT Provider. Domiciled in Sweden, XBT Provider ETPs are listed on the Nasdaq Stockholm exchange and can be traded on mainstream platforms such as Avanza or Nordnet in either euros or krona.
CoinShares also launched the first crypto ETP backed by ‘physical’ bitcoin in 2021. Unlike synthetic ETPs, which use derivatives to track the price of an underlying asset, physical ETPs buy and hold the asset, so they’re more accurate and transparent and they avoid counterparty risk. Digital asset custodian Komainu, supervised by the Jersey Financial Services Commission, stores the crypto held by CoinShares ETPs.
In a separate interview, Citigroup executive Itay Tuchman acknowledged that crypto firms tend to have better ‘technical capability and speed of build’. CoinShares took advantage of this flexibility to launch a range of Physical Staked ETPs in 2022 . These ETPs allow holders to earn a share of the rewards paid for participation in the ‘proof of stake’ consensus mechanisms used to process transactions on blockchains like Polkadot, Solana and Algorand.
Conclusion
Asset managers like BlackRock may boost demand for crypto by launching ETFs, but there are arguments in favour of investing in products issued by crypto-native firms. After all, the ecosystem is relatively young and presents challenges that mainstream FIs haven’t faced before.
CoinShares launched its first crypto ETPs in 2015 and has since issued a range of products backed by physical coins and offering exposure to staking. As CEO Jean-Marie Mognetti put it, CoinShares is a specialist consultant compared with BlackRock’s GP.
