The raise of crypto-assets management and why it matters to investors

Online investing has made ordinary people discover financial markets. Together with lockdowns and limited mobility triggered by the COVID-19 pandemic crisis, came hours and hours spent on social media and the internet, and all that made us even more aware of new ways of investing, among other things and realities.

Indeed, because these ways are the fingerprints, come without (or with less) intermediaries or don’t make people feel like the investing space is only reserved for the ones who dress in dark-blue suits every day, they have thrived in the past 15 months. It’s like a whole breed of amateur investors got seduced or are being seduced by online investing that increasingly relates to a crypto-asset, whichever it might be. 

But this story started long before the COVID-19 pandemic. For years crypto-assets have essentially been a retail space. Individuals, investing on their own from computers, phones and tablets, and often with a limited understanding or knowledge of it, were and still are bearing the costs of information asymmetry and the transaction fees of (un)regulated exchanges. Furthermore, retail investors have been dangerously trusting the good faith of investing platforms’ managers. And, frequently, platforms’ robustness falls short when it comes to exercising due diligence.

The more advanced investors, conscious, for example, of the cyber risks of crypto-asset investing, have relied on offline wallets, also called “cold storage”, i.e. when the digital wallet is stored on a platform that is not connected to the internet or  when it uses institutional grade custody solutions.

The times of retail crypto investing mainly via platforms whose reputation and baggage were not precisely crystal clear, seems to be slowly fading, at least partially. Large financial incumbents have started outlining plans to embrace crypto-assets. 

Crypto-assets’ appeal is a fact less and less can deny. With a market capitalisation that reached $2Tn in April 2021 —although the numbers have varied considerably in the last weeks, falling to 1.4Tn— there has been a waterfall institutional wave where most of the largest financial organisations have made their crypto plans quite clear by now. A new audience whose needs aren’t answered by retail investing is emerging.

Whether it is through the multiplication of investment structures, the development of crypto-assets servicing solutions at institutional levels, or via blockchain-based market infrastructures, crypto-assets management is coming and it’s likely bound for significant growth in a future that’s not far from now.

Regardless of their unpredictability and volatility, crypto-assets, infamous for the temporary bubbles they have generated over the last five years especially the quintessential cryptocurrency, Bitcoin (BTC) have broken into history and have no plans to leave the stage any time soon. Yes, true, they hold a historical branding and reputational issue but didn’t other innovations have it too, à l’époque

Read this blog entry to discover why you don’t want to miss the crypto-asset management wave.

 
Investment vehicles for crypto-assets are being born

Over the past few years the markets have seen the emergence of investment vehicles for certain types of non-retail investors that have eased access to crypto-assets or have simply removed the many burdens of investing directly in them. This trend is accelerating.

Arguably one of the most prominent examples of these emergent vehicles is US-based *Grayscale Investments which helps investors build portfolios with cryptocurrencies by means of product structures that investors commonly know. The organisation has even developed its own Bitcoin Trust. Another interesting case is the *Purpose investment’s BTC ETF, a firm based in Canada. In March 2021, this bitcoin crossed 1bn AuM within just one month of trading.

And while these are single crypto-asset backed vehicles, the demand for such products is skyrocketing. We expect significant developments in the second part of 2021 and beyond. According to recent information, eight ETFs are currently awaiting US SEC (Securities and Exchange Commission) approval, including those of Van Eck, Goldman Sachs, Fidelity and Morgan Stanley to name a few.

However, ETFs aren’t the only family of securities joining the crypto-assets race. For instance, there are also seizable developments in the open-ended mutual funds area.

*Stone Ridge, an American investment company based in New York, expects to open up the door for the mutual funds market to access BTC and other crypto-assets. The company has been seeking SEC filing approval that can have a massive impact on the crypto-assets management landscape in the future.

 
Why should you think of crypto-assets management?

In times of provocative and sometimes inflammatory tweets, a short answer might do the trick.

An answer such as “because thinking of crypto-assets management is unavoidable”, could it be convincing enough? We bet not and, what’s more, it will leave many of us quite skeptical. Anyway,  we just tried to emulate the various tweets that Elon Musk has shared regarding cryptocurrencies, especially bitcoin. 

Let’s, therefore, briefly elaborate on why crypto-assets management is in growing demand and increasingly needed by market participants.

1. Crypto-assets as an asset class

Over time the world has slowly but certainly moved from a context in which crypto-assets were considered no more than air or a dream of a few eccentrics or a ponzi scheme evento a situation where it is increasingly considered as a full-fledged asset class.

In fact, certain crypto-assets display high returns that can be further increased by seeking opportunities in the DeFI ecosystem that commonly uses blockchain-based smart contracts via eligible assets. This, combined with their almost inherent high volatility (at least so far) and, more interestingly, taking into account a quite low correlation with other asset classes, rationalises their role from a portfolio management perspective. 

In addition, there is a more and more widely accepted argument that  some crypto-assets provide inflation hedge, a particularly powerful feature in these times of exceptionally loose monetary policy across the globe. 

2. Crypto-assets management products are accessible and efficient 

In crypto-related matters running before walking isn’t an idea to be encouraged. 

For the average investor, understanding the world of crypto-assets investing isn’t that straightforward. Because of its nature, linked to a technology the world is just starting to understand properly, crypto-assets can be quite difficult to grasp, with a steep learning curve. For instance, a first exposure to the world of crypto-assets is often intimidating and undeniably complex at first sight.  

In fact, the multiple trading places available (and growing) and the onboarding processes —where one needs to be familiar with concepts such as wallets, private keys management or irreversibility of transactions— don’t make crypto-assets investment intuitive and this naturally creates entry barriers. That’s why crypto-assets management products are key to ease accessibility by removing part of or significantly reducing this inherent complexity.

Closely linked to accessibility is the way crypto-assets investment products are brought to investors. 

In the short term, we will certainly see crypto-fund shares available in their traditional shape.This is a first step forward, an intermediary phase that provides, somehow, a good means for investors to experiment and get comfortable with the technology and the novel concepts it brings with.

Looking beyond and for the industry to reap the full benefits of the underlying blockchain technology, investment crypto funds will issue, hold and transfer native security tokens over a blockchain-based infrastructure.

This, combined with stablecoins or CBDC (central bank digital currencies), will make delivery vs payment (DvP) effectively come true. In fact, the simultaneous issuing of all receipts and documents necessary to give effect to a transfer of securities either before or at the same time as its delivery, will allow for a fully automated update of the shareholders register. What’s more, it will remove the need for reconciliation and significantly enhance reporting accuracy and efficiency through automated data feed from on-chain transactions. These are just a few examples of improvements brought by the underlying blockchain technology.

Efficiency will be greatly improved accordingly.

3. Crypto-assets products sophistication need professional advice

Whereas the average retail investor will be likely interested in a limited number of crypto-assets, institutional investors vary greatly in terms of profile and investment objectives.  

For instance, they could look for active and passive investment vehicles, get access to a basket of crypto-assets to meet diversification criteria or to crypto-assets derivatives for risk management purposes, or even be exposed to more complex products.  This shows the growing and diverse demand for crypto-assets based investment products.

In addition, while the crypto-assets landscape has been and is still dominated by no more than 10 assets, thousands of them —presenting specific features and investment rationale— are available for investment among numerous subsets. As a consequence, professional support has become quite necessary and valuable and is in growing demand from both investment policy and general investment advice standpoints.

Quite frankly, crypto-assets come with many specific features and hold undeniable complexity though they are opening up a whole new world of opportunities for both asset managers and investors, institutional or not. The days when anything crypto was considered as a matter of the darkest twists and turns of the web are long gone and outdated. 

Crypto-assets are expected to significantly impact traditional asset management the more product offerings and market infrastructures develop. While total AuM of crypto-assets investment vehicles are still small compared to traditional UCITs or AIFs funds, recent and upcoming regulatory developments, growing market demand and the recent approval of some passive investment structures are turning crypto-assets into a critical domain to watch in 2021 and beyond.

(*) The brands mentioned above are for illustrative purposes. it is not an endorsement or recommendation. 

 
What we think
Thomas Campione, CFA Blockchain and Crypto-assets leader at PwC Luxembourg

Crypto-assets are a broad family made of closely related but quite different members, each of them having its own features and investment or use rationale. By now, market participants widely accept that at least some of them behave as a new fully fledged asset class. Crypto-asset management is inevitable. Factors such as the massive development of institutional grade crypto-assets servicing solutions, a strong market demand from investors, the perspectives of new revenue streams and the potential for broadening customer base, can account for that. Despite some regulatory concerns and operational burdens that still exist today, early movers have the opportunity to build a competitive edge and position themselves in the driving seat of an emerging industry poised to grow exponentially.

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