Article initially published on Luxembourg Blockchain Week
For many years, the world of crypto-assets has essentially been a retail space where individuals invested on their own, bearing the costs of information asymmetry and transaction fees of (un)regulated exchanges, while managing the burden of self-custody using cold storage for the more advanced.
That time has gone.
With a crypto-assets market cap of $2Tn (at time of writing), an institutional tsunami where most of the biggest financial institutions have now made their crypto plans quite clear and a historical branding issue which is increasingly less of an issue, a new audience with new needs has entered the scene and the retail approach is not an option for them.
Whether it is through the multiplication of investment structures, the development of institutional grade crypto-asset servicing solutions or blockchain-based market infrastructures, CryptoAM is coming and is poised for significant growth.
Beyond the many recent market developments, the natural question is, why even think about CryptoAM? The short answer may leave some sceptical, so let’s elaborate:
Over the years we slowly but certainly moved from a situation where crypto-assets were considered as thin air – even Ponzi for some – to a situation where they are more and more considered a full-fledged asset class – displaying high returns combined with high volatility, and more interestingly a quite low correlation with other asset classes, which rationalises their role from a portfolio management perspective.
In addition, there is a widely accepted argument that some crypto-assets provide inflation hedge, a powerful feature in these times of exceptional loss due to monetary policy across the globe.
For the average investor, crypto-assets can be quite difficult to grasp, if not completely esoteric. Furthermore, the way one can gain access adds even more complexity at first sight. The multiple trading places available and their onboarding processes, concepts such as wallets and private keys management or irreversibility of transactions do not make crypto-asset investments super intuitive. This naturally creates barriers to entry. In that context, CryptoAM products are key to easing accessibility by removing some, or all, of this inherent complexity.
Closely linked with accessibility is the way crypto-assets investment products are brought to investors. In the short term we will see crypto-funds shares available in their traditional shape, complemented by a tokenised version of these shares. The latter is a first step forward, an intermediary phase that provides a good avenue for experimenting and getting comfortable with the technology and the new concepts involved. Looking beyond, and for the industry to reap the full benefits of the underlying blockchain technology, native security tokens will be issued, held and transferred over a blockchain-based infrastructure.
This, combined with stablecoins or CBDC, shall significantly improve the performance of delivery vs payment, allow for a fully automated update of the shareholders register and underlying corporate actions, remove the need for reconciliation, and significantly enhance reporting accuracy and efficiency through automated data feed from onchain transactions. Efficiency will be greatly improved accordingly.
Whereas the average retail investor will go long on a given scope of crypto-assets, institutional investors vary greatly in terms of profile and investment objectives. They will seek active and passive investment vehicles, exposure to a basket of crypto-assets to meet diversification criteria, crypto-asset derivatives for risk management considerations and other more complex products. This explains the growing demand for diversity and therefore for crypto-assets based investment products.
In addition, while the crypto-asset landscape has been, and is still, dominated by ten assets or so, thousands of them are available for investment amongst numerous subsets presenting specific features and investment rationale. Accordingly, professional support has become quite valuable and in demand from an investment policy and more general investment advice standpoint.
Crypto-assets come with many specific features and an undeniable complexity but they open up a new world of opportunities for asset managers and investors (institutional or not). This asset class is expected to have a structural impact on traditional AM as product offering and market infrastructures develop. A critical space to watch in 2021 and beyond!