The rise of cryptocurrencies as a new asset class
When Bitcoin was first presented to the world in 2008, it had the support of just a handful of enthusiasts. However, it has proven its merits over time, leading the way for the further development of blockchain technology and the creation of numerous other cryptocurrencies.
With growing adoption and acceptance, cryptocurrency has demonstrated it is not a passing trend and has real potential as its own asset class within investment portfolios.
Whilst the demand is evident, many investors, particularly institutional ones, face difficulties to successfully access the product and bridge the gap between the underlying decentralised online blockchain technology and traditional investment structures.
A history of Bitcoin
Despite interest in Bitcoin growing in recent years, cryptocurrencies have actually been around for much longer.
Bitcoin was the first of these cryptocurrencies to be created, more than 10 years ago now.
The timeline below shows many of the key events and milestones that have taken place during Bitcoin's creation and evolution.
Source for Bitcoin Price: WisdomTree (from 03 January 2009 when Bitcoin went live until 12 June 2015) and Coinbase (13 June 2015 onwards).
Could crypto be accessed via traditional investment channels?
To date there have been several attempts to integrate cryptocurrencies into traditional investment vehicles with varying levels of success. For the most part, investors have had to enter a new, crypto-native environment in order to gain exposure to a given cryptocurrency. This could involve sending funds to unregulated entities to facilitate purchase, which is a risk many managers are understandably unwilling to take.
At WisdomTree, we see many parallels between the crypto space and commodities when it comes to difficult to access asset classes. Take gold as an example: access to industrial vaulting facilities has historically only been available to institutions with scale in the space. For everyone else, an investment in gold required either costly secure storage or an increased risk of loss or theft. In 2003, we launched the world’s first physically-backed gold exchange traded product (ETP), which delivered market-leading access via an equity-like instrument that traded on regulated exchanges. This development was a key driver in democratising access to gold across the world. The ETP structure has since become ubiquitous within the commodity investment space and is now the go-to for tens of billions of dollars globally.
We strongly believe that a robust ETP structure can deliver similar benefits for cryptocurrency investing, making it accessible to the mainstream investment community and providing a familiar investing experience in a regulated environment.
Whilst there has been progress in some countries, there is still a long way to go before crypto ETPs are universally available across Europe, a development that we’re committed to working towards.
Safely storing digital assets is not only about protecting against hacks, but also protecting against the theft or inadvertent loss of an encryption key. While there are several robust solutions out there for the safeguarding of crypto assets, these are based on distinct technologies and workflows. Implementing these solutions can be a steep learning curve as well as a costly operational exercise.
Investing in cryptocurrencies through an ETP structure could allow investors to transfer the expensive and time-consuming burden of managing encryption keys to the issuer and to benefit from institutional-grade safeguarding of assets.
Product standardisation is an aspect of the ETP wrapper that could benefit investors in cryptocurrencies. Trading, holding and accounting for investments in ETPs are well established and the provision of crypto exposure in this format could allow such investments to fit within an investor’s existing systems, processes and risk management.
Additionally, providing crypto exposure in an ETP could deliver benefits from standard market features that many investors rely on. Centralised clearing, an exchange listing on a recognised venue and standard settlement practices all lower the operational and counterparty risk of making investments.
Transparency is a core component of the ETP structure. A cryptocurrency ETP could offer a core measure of confidence for investors by enabling access to an audited website from the issuer, showing exactly how many coins are represented by the outstanding fund shares. This is already standard practice in physical gold ETP structures and provides an incomparable measure of transparency for investors.
ETPs tend to bring a centralisation of liquidity to asset classes. They draw investors of many types into the same structure, creating a centralised core of liquidity which sometimes even surpasses that of the actual underlying asset owing to the wide appeal of the wrapper.
This could be especially impactful in the crypto space as the current ecosystem is quite fragmented, with trading happening across 10+ venues with no common settlement infrastructure. An investor would need to separately establish connectivity to each venue in order to access its liquidity. Investment in an ETP essentially outsources this responsibility to specialist market makers, with trading infrastructure to manage many exchange connections. In this way, the ETP could act as a liquidity aggregator for the underlying crypto market.