ETF and active fund managers: what is stopping them from investing in crypto?

Larry Fink’s annual letter to shareholders is always watched closely for clues as to what the head of the world’s largest asset manager is thinking. And, this year, it has revealed only a hint of global warming.

“As we see an increase in our customers’ interest, BlackRock is studying digital currencies, stable currencies, and the underlying technologies to understand how they can help us serve our customers, ”Fink wrote.

This line was a remarkable turnaround for the CEO, who once said, “Bitcoin only shows the amount of money laundering demand that exists in the world.” It seemed to reflect a broader thaw in the attitudes of asset managers toward cryptocurrencies.

But while smaller players have rushed to meet the voracious demand for cryptocurrency from retail investors, major players like BlackRock, which runs the iShares fund empire, have been deterred by volatility, regulatory concerns and discouraging logistics of running. cryptocurrencies. investment products.

After Fink sent his letter in March, those concerns were confirmed. Cryptocurrency prices have suffered significant and prolonged falls. Bitcoin, the largest token, lost 50 percent of its value against the dollar between March and late last week, and fell more than 70 percent from its peak in November.

In May, investor confidence in cryptocurrency received another blow after a popular token called Terra, which promised to match the value of the US dollar, collapsed, eliminating investments of more than $ 40 billion, including many individuals who put the your savings on the project.

For critics, these strong market movements and high-profile explosions have underscored the long-standing concern that cryptography is too volatile to be a suitable fundraiser and that many of its highly promoted projects and innovations lack a solid foundation.

Taimur Hyat, investment director at PGIM Group, the $ 1.4 trillion asset manager, was willing to consider the merits of cryptography. “With a market cap of more than $ 1 trillion, cryptocurrencies have grown too large to ignore,” he said in a recent report. “For institutional investors, they offer the appeal of extraordinary and diversified returns in a market that now has sufficient size and liquidity for significant institutional positions.”

But after a detailed review, PGIM concluded that digital assets were basically non-investable. “Despite the hype, we find little evidence that cryptocurrencies offer significant opportunities for institutional investors,” Hyat explained.

© Bloomberg

However, some are less skeptical. Even in May, when the collapse of Earth shook the world of cryptography, investors spent an average of $ 66.5 million each week on virtual asset investment products, according to CryptoCompare data. These vehicles, such as the Grayscale Bitcoin Trust and exchange-traded products, offer investors exposure to cryptocurrencies without holding tokens directly, making it easier to enter the market.

DIY investors, who manage their own savings, are a key customer base for managers offering these products. “Managing cryptographic assets remains a very, very retail-oriented assignment,” said Jean-Marie Mognetti, CEO of CoinShares, the Jersey-based company that offers a range of publicly traded cryptocurrency products.

Leading asset managers, such as Invesco and Fidelity International, have launched similar products for sophisticated investors. But managers who dominate the market for publicly traded funds for traditional assets – iShares and Vanguard from BlackRock – are still on the sidelines when it comes to crypto.

Mognetti says older players perform thorough checks, sometimes taking many years, before moving forward with new offers. “They want to see a record, they want to see audits, they want to see all these controls and counterweights that typical cryptographic companies don’t have at first,” he points out. “They have to build [up a] registration “,

Unless and until the big players are comfortable with cryptographic products, the demand for investors will be met by more specialized players.

Mognetti says companies like yours have the advantage of agility and knowledge of digital assets in fast-changing crypto markets, but they need to be careful not to neglect investor protections. “People always say you have to go super fast,” he says. “It’s about finding the right balance between going fast and offering something that’s half cooked and half cooked.”

The regulation has also prevented the release of cryptocurrencies. In the UK, the Financial Conduct Authority has opposed giving retail investors exposure to cryptocurrency through fund structures, while the US Securities and Exchange Commission has not yet approved applications from several managers to launch a spot cryptocurrency ETF. U.S. companies, on the other hand, have used cryptocurrency futures to track the price of tokens.

Ophelia Snyder, co-founder and president of 21 Shares, the Swiss-based cryptocurrency group, believes that acceptance of digital assets has come a long way.

“When we launched the product four years ago, no one would touch it,” recalls Snyder, who has Ark Invest founder Cathie Wood as a mentor. “The level of technical detail you need is quite high. That reality disproportionately benefits specialist companies.”

His company and others in the industry are betting that the dramatic drop in cryptocurrency prices in recent times is a blow to the road and that demand for their products will continue to grow. “It’s painful early for the industry,” Snyder says. “It’s painful, painful early for stock market products.”

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