Cryptocurrencies are no longer for geeks: large funds bless digital assets | Financial markets

Ever since cryptocurrencies rose to prominence, they have been dogged by a reputation as a frivolous, speculative and “zero real value” investment product, according to the European Central Bank (ECB). Slightly less than the casino bet placed by retail investors via mobile apps. While many of the doubts they raise have not been put to rest, US regulators’ approval of bitcoin exchange-traded funds in January was the first sign that markets were taking aim. In recent weeks…

Ever since cryptocurrencies rose to prominence, they have been dogged by a reputation as a frivolous, speculative and “zero real value” investment product, according to the European Central Bank (ECB). Slightly less than the casino bet placed by retail investors via mobile apps. While many of the doubts they raise have not been put to rest, US regulators’ approval of bitcoin exchange-traded funds in January was the first sign that markets were taking aim. In recent weeks, the approval of a new fund, this time on Ethereum, and the appetite shown by US institutional investors in their quarterly reports have confirmed that these cryptocurrencies are no longer just for geeks. Meanwhile, Bitcoin is trading near its all-time high.

ETFs, or exchange-traded funds, were the catalyst for what crypto assets were about to leave behind. crypto winter suffer from bankruptcies, collapses and multimillion-dollar scams. With cryptocurrency gurus such as the founders of Binance and FTX behind bars, the sector needed new partners to resume the success achieved during the height of the health crisis. In January this year, the US regulator SEC became an unexpected ally by greenlighting the first Bitcoin spot ETF. Added to this is a new exchange-traded fund for the Ethereum cryptocurrency. Spot ETFs replicate the performance of an asset. They were popularized in the 2000s to mimic the price of gold or oil and offered investors a number of advantages in terms of cost, availability and, above all, security when trading on a regulated market.

Regulators are leading the way: In Europe, the door has opened through ETPs (listed products, not funds), products that emerged in 2019, although they have not been popular with large managers. Around 130 cryptocurrencies are already listed on various stock exchanges of the Old Continent, such as Paris, Amsterdam and Zurich. However, the real change will come in December when the European crypto asset regulation known as MiCA comes into force. Among the new features of this European directive, crypto service providers will be able to operate throughout the public block without the need to obtain 27 different licenses. As Citi analysts note, there is a “change in regulatory winds.”

Of course, all major regulators influence the distrust that cryptoassets generate towards them. When the Securities and Exchange Commission (SEC) approved the first Bitcoin funds, it did so with an asterisk: “Bitcoin is primarily a speculative and volatile asset that is also used for illegal activities such as ransomware, money laundering, sanctions evasion and terrorist financing.” The ECB, for its part, seeks to regulate Bitcoin “to the point of virtually banning it” and stresses that “it has not delivered on its promise to become a global and decentralized currency,” they noted in a strongly worded document in February this year. revealing title: Bitcoin ETF Approved: The Naked Emperor’s New Clothes. All this in preparation for the launch of the digital euro.

Speculative or not, professional investors see them as opportunities. Last week, quarterly reports on assets that large US funds must submit were released. This quarter was particularly important as it is the first since the approval of a Bitcoin ETF in January of this year. And the asset passed the cotton test of a professional investor: from hedge funds pension funds, more than 600 institutional investors took positions in Bitcoin. Particularly relevant was the report of the Wisconsin State Fund, which allocated 160 million for Bitcoin during this period. That is 0.1% of its $146 billion in assets.

The Midwestern state’s participation came primarily through the world’s largest Bitcoin ETF, worth more than $20 billion, which in turn was facilitated by the world’s largest manager: Black Rock. That same week, UBS, Switzerland’s largest bank, also said it had a $145,000 position in a Bitcoin ETF managed by BlackRock. Other giants such as JP Morgan, Wells Fargo, BNP or Royal Bank of Canada have increased their investments. These are mostly small positions, but they indicate a paradigm shift among the investment giants.

ETFs were an “in and out highway” between the traditional financial world and crypto assets, says Roman Gonzalez, a fund manager specializing in these A&G products. “They used to be hard to buy,” notes the manager, who along with his colleague Ruben Ayuso highlight the “paradigm shift” that has prompted the approval of regulated investment vehicles in cryptocurrencies. With such small risks, around 1%, investors are starting to get their foot in the door. “It’s like taking the training wheels off a bicycle when you learn to ride,” managers say.

And all this despite accusations of its speculative nature or lack of real value behind it. And doubts generated by the collapse of such giants as FTX. “The severity of an asset is subjective,” says Manuel Villegas, an analyst at Swiss bank Julius Baer. “What’s interesting is its role in an investment portfolio,” emphasizes the digital asset analyst, who notes that, given the numbers, a traditional portfolio with 60% variable income and 40% fixed income “has historically benefited” from 1% Bitcoin. “Investors want publicity,” he emphasizes. Institutional investor participation will increase because “it’s a dream asset” that enhances any investment profile, be it “conservative, balanced or aggressive,” Ayuso of A&G said.

At the moment, cryptocurrencies backed by ETFs or ETPs are reacting: Bitcoin, the flagship of crypto assets, was trading above $68,100 this Friday, close to the all-time high set in March and already very far from crypto winter crossed in the first half of 2022. Since January, it has risen in price by more than 55%, and over the past 365 days its value has more than doubled (+147%). Ethereum, in turn, is up 60% this year. “They are becoming global assets,” explains Julius Baer’s Villegas, who notes that they have acquired a role in the financial ecosystem: the role of measuring, like gold, the market’s appetite for risk.

Access to products

In Spain, the explosion caused by ETFs and the interest of new groups in gaining access to cryptocurrencies is meeting with caution from traditional institutions. BBVA is one of the few local banks that offers some type of crypto product to its customers through exchange-traded notes (ETNs) issued by Fidelity that replicate the characteristics of Bitcoin. In other regions, the Basque-based bank offers services for buying and selling digital currencies to its private banking clients. Something similar is happening with the Santander group, which through its digital banking Openbank offers access to 13 traded products (ETPs) that offer access to cryptocurrencies or related companies.

While major Spanish banks remain wary of offering crypto products, Spanish managers are looking to quickly position themselves in what they hope will be a very lucrative market. At the end of 2023, A&G Fondos launched the first free investment fund aimed at digital assets, the first of its kind to be sold in Europe. Later in April this year, Renta 4 joined rivals with a similar fund that also invests in digital currencies, which also opens the door to discretionary portfolio management clients.

Both funds take the same approach: they invest in publicly traded instruments using Bitcoin, Ethereum and, to a lesser extent, other secondary digital assets. Both investment vehicles – available only to professional investors and with a minimum entry of 10,000 euros in the case of A&G and 30,000 euros in the case of Renta 4 – take advantage of the advantages of ETPs to avoid taking on direct responsibility for the custody of cryptocurrency, which is especially sensitive after the scandal with FTX. At the same time, as both managers clarify, the funds provide clients with an “efficient and simple” option to access cryptocurrencies without having to work on new platforms. At the same time, they emphasize the importance of “professional management,” which protects the investor, often without specialized knowledge of digital assets, from the siren song of cryptocurrency memes.

This does not mean that large crypto platforms are not trying to expand their reach beyond small savers. Bitpanda, one of the largest brokers cryptocurrency of European origin, launched at the end of January, a service aimed at the specific needs of high net worth individuals, family offices and corporate treasuries. Bit2Me, a Spanish firm owned by Telefónica and BBVA, also unveiled its own service in May to attract high-resource investors as well as corporate clients. Currently, the company said it has more than 4,000 companies registered, as well as more than 1,500 clients with balances above €100,000.

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