How to decrypt bitcoin for Wall Street

The fluctuating price of bitcoin bears a repetitive hallmark: true believers hoard the vast majority of bitcoin in circulation and wait for the next wave of new disciples to push up the value by fighting for the scraps.

This inevitably powers up the price of most other cryptocurrencies, which follow on the coat tails of bitcoin.

Those waves of sudden increased demand have been driven by everyday people on the street and latterly by technology companies making large investments. Could another swell originate from institutional investors, such as hedge funds and asset managers?

Some cryptocurrency financial firms seem to believe so, issuing so-called ‘Exchange Traded Products’ (ETPs) that give investors exposure to cryptocurrencies without ever having to handle them. ETPs are traded on traditional stock exchanges and either gain or fall in value depending on the fortunes of the cryptocurrencies they track.

They are aimed at professional traders who want the gains without having to get their hands dirty by buying and storing cryptocurrencies. And there are signs that Wall Street traders are lining up to take a punt on decentralised digital currencies. For example, one of the world’s largest asset managers, Fidelity, is expanding its cryptocurrency services for clients while Goldman Sachs has started making forays into the market.

+ How Switzerland is gentrifying bitcoin

Crypto ETPs have been around for a few years. Bank Vontobel issued the first such financial product in Switzerland in 2018. Since then, Switzerland has become a prime trading venue. The SIX and BX Swiss stock exchanges turned over CHF6.5 billion in crypto ETP trading activity in the 12 months leading up to September 2022, states a report from the Lucerne University of Applied Sciences and Arts.

New Zurich base

There are other active crypto ETP trading venues, most notably Frankfurt, but several issuers have chosen Switzerland as their global or European base of operations, including FiCAS, Valour and Sygnum and SEBA banks.

One of the world’s largest crypto ETP issuers, 21Shares, is expanding in Switzerland. Its Cayman Islands incorporated parent company Amun Holdings recently established an operational hub, 21.co, in Zurich.

“Switzerland has a combination of a high calibre financial and technology talent, which is not always easy to find in the same place,” co-founder Ophelia Snyder told swissinfo.ch. “The Swiss crypto ecosystem is extremely open but doesn’t have the same start-up approach and risk appetite as Silicon Valley. That’s something we are bringing to the table. We are a Silicon Valley style company based in Zurich.”

The crypto ETP business concept is vulnerable to the extreme volatility in prices. In the last 18 months, the price of bitcoin surged more than ten-fold before losing two-thirds of its value. In the corresponding period, the value of assets under investment in 21Shares products rose from $25 million to $3 billion before dropping to $1.4 billion. According to market research group ETFGI, the global volume of assets invested in crypto ETPs globally more than halved from $16.3 billion in 2021 to $7.4 billion billion by the end of August.

Snyder and fellow co-founder Hany Rashwan remain bullish about prospects despite the recent blood that was spilled on the carpet. “We launched our company at the height of a previous cryptocurrency bull market. We slaved away to get $5 million in seed funding. We launched on a Thursday and by the next Monday it was worth $3.5 million, purely from market volatility” Rashwan said. “Four years later, are now larger than some of the Swiss private banks and brokerages that people are using to buy our products.”

In July, with the cryptocurrency market crashing in spectacular fashion, 21.co raised $25 million from London-based hedge fund Marshall Wace and other investors, pushing the group’s value to $2 billion. This valuation is based on “nine-digit” (at least $100 million) revenues last year, of which 21Shares contributed $32.6 million.

No panic

Rashwan repeated a common refrain among cryptocurrency enthusiasts that while volatility is a hallmark of the emerging asset class, its long-term trajectory is positive.

“We enjoy the bear market [slump in prices]. The tourists have to leave, greater focus and discipline comes into the space and you see more visible effects from real product innovation,” he said.

Cryptocurrencies offer a more profound value than making investors rich by converting them to traditional currencies at the right moment. Cryptocurrencies are created to allow people to operate the underlying blockchains and to fuel independent economic systems of peer-to-peer payments and transactions.

But any asset that creates practical value, and therefore generates demand, will inevitably become a tradeable asset. ETP issuers have stepped into this intersection between the worlds of traditional and crypto finance.

They are banking on hedge funds and asset managers driving the next wave of cryptocurrency adoption by making bitcoin, and other cryptocurrencies, more palatable for professional investors.