Straightforward access to cryptocurrency
Accessing bitcoin investments through a product which is listed on a recognised stock exchange and is liquid can ease many institutional investor concerns around allocation to this asset class.
“Historically there was a feeling that bitcoin was on the fringes as a target for investment. We couldn’t even refer to cryptocurrencies as an asset class. However, sentiment is changing and products like ours are facilitating this change and enabling it to happen,” observes Bradley Duke, chief executive of ETC Group.
The group launched world's first centrally cleared bitcoin ETC. The product, called BTCetc bitcoin Exchange Traded Crypto (BTCE) is listed on the Deutsche Boerse and SIX stock exchange and is distributed in Europe by HANetf, an independent provider of UCITS exchange-traded funds.
As of January 2021, BTCE has over USD500 million in assets under management, which it raised in the seven months since its first launch on the German exchange in June 2020.
Duke explains the reason why initially larger investors have stayed away from bitcoin investments: “Most institutional investors have rules around the kinds of assets they can invest in. Some can only buy products that are listed on major stock exchanges around the world. In developed markets you might have some funds which have a small portion to invest in something a little bit more exotic but for most, unregulated digital assets or cryptocurrencies are a non-starter. So because of these rules, they were essentially excluded from the market.”
A product like BTCE however, which is traded on major stock exchanges with tight spreads, can help institutional investors gain access to the cryptocurrency market. It also simplifies the process of allocating to bitcoin. Investors bypass the technical challenges of purchasing and storing bitcoin and the risk of trading on unregulated crypto exchanges. Through an exchange traded product, the investors aren’t required to engage with arcane blockchain technology at all.
New safe haven
In addition to being a new and innovative space, the growing interest in cryptocurrencies has also been driven, to a certain degree, by investors’ need for yield and also the impact of the Coronavirus pandemic. Duke elaborates: “Central banks are funding these huge stimulus packages by increasing the money supply. This unleashes inflationary forces which makes bitcoin attractive if you’re an asset manager or an asset owner with holdings in the US dollar, pound sterling or euro.
“So, as investors are starting to worry about their investments denominated in major currencies, it makes sense for them to take a small percentage of their portfolio – be it 5 per cent or even 1 per cent – and put it into something like bitcoin to act as a hedge against inflation.”
Traditionally, investors turned the gold allocations in these situations; bitcoin is now providing an alternative.
Duke comments: “Instead of seeing bitcoin as a wild west type of asset, they're starting to see it as a safe haven in the same way that they see gold. That’s a huge shift. The reason why they see bitcoin in this way is because it's a hard currency as there are only 21 million units that will ever be in circulation, according to the blockchain itself. This contrasts sharply with traditional currencies of which there seems to be an endless supply.”
This sentiment is being reinforced by various moves in the market. US insurance firm MassMutual bought USD100 million of bitcoin in later 2020 and asset management giant BlackRock took its first step into the crypto world as it included bitcoin derivatives in prospectus filings with the US Securities and Exchange Commission.
“There is also Fidelity offering custody of cryptocurrency, which further shows these cornerstones of institutional wealth are entering the space. Given the state of the world economies at the moment, it may actually become problematic for investors not to engage with bitcoin. For them not to see the opportunity and have at least some allocation to these assets could be seen as borderline negligent. Institutional investors have a duty to stakeholders to invest and protect the value of their assets,” cautions Duke.
Although the number of listed, exchange traded products linked to cryptocurrencies is growing, Duke warns that not all products are created equal: “We’re seeing more products entering the fray, almost on a monthly basis. However, investors need to be aware of certain differences. BTCE is 100 per cent backed by physical bitcoin and is fully fungible – meaning you can convert from BTCE into bitcoin and back again very easily. Our product also tracks the bitcoin price very accurately because any dislocation would result in an arbitrage opportunity.”
Having the product be fully backed by bitcoin holdings reduces counterparty risk for investors given new BTCE shares cannot be created without the physical bitcoin already being held in cold storage by a regulated custodian.
Security is another dimension the firm has taken into account when building BTCE. “We added many security features to our product because we wanted to keep front of mind the key things which are important to institutional investors. All the assets under management are pledged to a trustee so should anything go wrong, they will make good all the obligations which have been issued. We also have an independent administrator who approves all creation and redemptions. In addition, the administrator can only be changed by the trustee,” Duke notes.
The firm aimed to create an institutional grade product, this includes multi-signature cryptocurrency wallets to help manage risk. The assets are also insured against fraud and hacking up to USD100 million. Duke comments: “Although it’s unlikely, should there be any such event, investors take comfort that there is this added protection in place.”
Looking ahead, the momentum behind BTCE will ultimately serve the investors well. According to Duke: “As our assets under management continue to grow, larger asset managers and investment firms can take bigger stakes in the product, should they choose to.”