The Rise of Crypto Assets
When Bitcoin was first presented to the world in 2008, it had the support of just a handful of enthusiasts. However, it has continued to gain legitimacy over time, leading the way for the further development of blockchain technology and the creation of numerous other cryptocurrencies.
With growing adoption and acceptance, cryptocurrencies have demonstrated they are not a passing trend and have real potential as their own asset class within certain investment portfolios. However, crypto assets may not be an appropriate or prudent diversifier for all portfolios. Crypto assets, such as bitcoin and ether, are complex, exhibit extreme price volatility, are unpredictable, can become illiquid at any time, should be viewed as highly speculative and may result in an entire loss of investment. Please consult your own financial advisor, lawyer, accountant or other advisor before making any financial decision.
While the demand is evident, many investors, particularly institutional ones, face difficulties in successfully accessing the product and bridge the gap between the underlying decentralized online blockchain technology and traditional investment structures.
A History of Crypto
Despite interest in Bitcoin growing in recent years, cryptocurrencies have actually been around for quite a while.
Bitcoin was the first of these cryptocurrencies to be created—more than 10 years ago now. Ethereum followed in 2015.
The timeline below shows many of the key events and milestones that have taken place during the creation and evolution of Bitcoin and Ethereum.
Source for Bitcoin Price: WisdomTree (from January 3, 2009, when Bitcoin went live until June 12, 2015) and Coinbase (June 13, 2015, onward). Source for Ethereum Price: Coinbase.
Past performance is not indicative of future results.
Could Crypto Be Accessed via Traditional Investment Channels? Not Yet, but It May Be Coming.
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 presenting a number of different risks to consider and navigate in order to gain exposure to a given cryptocurrency. Among other things, this could involve sending funds to unregulated entities to facilitate purchase, which is a risk many managers are understandably unwilling to take.
WisdomTree is working on a solution that may be of great interest to investors and financial advisors looking to integrate this new asset class into their financial plans.
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How ETFs Could Unlock the Crypto Asset Class
In our crypto video, we examine how the ETF structure could deliver similar benefits for cryptocurrency investing, making it accessible to the mainstream investment community and providing a familiar investing experience in a regulated environment.
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 cryptoassets through an ETF 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 standardization is an aspect of the ETF wrapper that could benefit investors in cryptocurrencies. Trading, holding and accounting for investments in ETFs 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 ETF could deliver benefits from standard market features that many investors rely on. Centralized clearing, an exchange listing on a recognized venue and standard settlement practices all lower the operational and counterparty risk of making investments.
Transparency is a core component of the ETF structure. A cryptocurrency ETF 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.
ETFs tend to bring a centralization of liquidity to asset classes. They draw investors of many types into the same structure, creating a centralized 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 ETF essentially outsources this responsibility to specialist market makers, with trading infrastructure to manage many exchange connections. In this way, the ETF could act as a liquidity aggregator for the underlying crypto market.
Commentaries from Our Thought Leaders
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