Cryptocurrencies are no longer a thing for geeks: large funds bless digital assets

Since they gained notoriety, cryptocurrencies have been dogged by the reputation of being an investment product of little seriousness, speculative and of “zero real value”, in the words of the European Central Bank (ECB). Little less than a casino bet placed through mobile applications by retail investors. Although many of the doubts they generate have not been dispelled, the US regulator’s approval of bitcoin exchange-traded funds in January was the first indication that the markets had them in their sights. In recent weeks, the approval of a new fund, this time on Ethereum, and the appetite shown by American institutional investors in their quarterly reports have confirmed that these cryptocurrencies are no longer just a thing for geeks. Meanwhile, bitcoin is trading near its all-time highs.

ETFs, or exchange-traded funds, have been the catalyst that crypto assets needed to leave behind a crypto winter plagued by bankruptcies, collapses and multi-million dollar scams. While crypto gurus ended up behind bars, like the founders of Binance and FTX, the sector needed new partners to resume the prosperity achieved in the midst of the health crisis. In January of this year, the SEC, the US regulator, became an unexpected ally by giving the green light to the first bitcoin spot ETFs. Added to this is the new exchange-traded fund for the Ethereum cryptocurrency. What spot ETFs do is replicate the performance of an asset. They were popularized in the 2000s to emulate the price of gold or oil, and offer a series of advantages to investors, in terms of costs, accessibility and, above all, security, when traded within a regulated market.

Regulators are paving the way: in Europe, the doors were opened through ETPs (listed products, not funds), products that landed in 2019 although they were not popular among large managers. There are already around 130 cryptocurrencies listed on various stock exchanges in the Old Continent, such as Paris, Amsterdam and Zurich. However, the real change will come in December, with the implementation of the European cryptoasset regulation, known as MiCA. Among the new features of this European directive, crypto service providers will be able to carry out their activity throughout the community bloc without the need to obtain 27 different licenses. There is, as Citi analysts point out, a “shifting regulatory winds.”

Of course, all the major regulators influence the distrust that cryptoassets generate in them. When it approved the first bitcoin funds, the SEC did so with an asterisk: “Bitcoin is primarily a speculative and volatile asset that is also used for illicit activities such as ransomware, money laundering, sanctions evasion, and terrorist financing.” The ECB, for its part, is committed to regulating bitcoin “to the point of practically prohibiting it” and emphasizes that “it has failed in its promise of being a global and decentralized currency,” they noted this February in a document with a very revealing title: Approval of bitcoin ETFs: the new clothes of a naked emperor. All this while preparing the launch of the digital euro.

Speculative or not, professional investors see an opportunity in them. Last week the quarterly asset reports that large US funds must submit were made public. This quarter was especially important, because it is the first after the approval this January of the bitcoin ETFs. And the asset has passed the professional investor’s cotton test: from hedge funds to pension funds, more than 600 institutional investors have emerged positions in bitcoin. Especially relevant was the report from the Wisconsin state fund, which allocated 160 million to bitcoin in this period. That is, 0.1% of its $146 billion in assets.

The participation of the Midwestern state has been done largely through the largest bitcoin ETF in the world, with a value of more than 20 billion dollars, and promoted by what is, in turn, the largest manager in the world : Black Rock. In the same week, UBS, Switzerland’s largest bank, also revealed that it holds a position worth $145,000 in the bitcoin ETF managed by BlackRock. Other giants such as JP Morgan, Wells Fargo, BNP or Royal Bank of Canada have raised their investments. They are, for the most part, small positions, but they indicate a paradigm shift among the investment giants.

ETFs have been an “entry and exit highway” between the traditional financial world and crypto assets, says Román González, fund manager specialized in these A&G products. “Before, they were difficult to buy,” points out the manager, who highlights, together with his colleague Rubén Ayuso, “the paradigm shift” that the approval of regulated investment vehicles in cryptocurrencies has brought about. With these small exposures, around 1%, investors “are starting to get their foot in the door.” “It’s like taking the training wheels off your bicycle when you learn to ride,” the managers point out.

And all despite accusations about its speculative nature or the absence of real value behind it. And the doubts generated by the collapse of giants like FTX. “The seriousness of an asset is subjective,” says Manuel Villegas, an analyst at the Swiss bank Julius Baer. “What is interesting is its role in an investment portfolio,” emphasizes the digital asset analyst, who points out that, with the numbers in hand, a traditional portfolio, of 60% variable income and 40% fixed income, “historically benefits ” of 1% of bitcoin. “Investors want exposure,” he stresses. For Ayuso, from A&G, the participation of institutional investors will increase, because “it is a dream asset”, which improves any investment profile, whether “conservative, balanced or aggressive”.

For now, cryptocurrencies backed by ETFs or ETPs are responding: bitcoin, the flagship of cryptoactives, was trading above $68,100 this Friday, close to the all-time high set in March and already very far from the crypto winter crossed in the first half of 2022. Since January it has appreciated more than 55%, and in the last 365 days its value has more than doubled (+ 147%). Ethereum, for its part, is up 60% so far this year. “They are becoming global assets,” explains Villegas from Julius Baer, ​​who points out that they have acquired a role in the financial ecosystem: that of measuring, like gold, the market’s risk sentiment.

Access to products

In Spain, the explosion caused by ETFs and the interest of new groups in gaining exposure to cryptocurrencies runs into the caution of traditional entities. BBVA is one of the few local banks that offer some type of crypto product to its clients, through an exchange-traded bond (ETN), issued by Fidelity, that replicates the performance of bitcoin. In other geographies, the bank of Basque origin offers services for the purchase and sale of digital currencies to its private banking clients. Something similar happens with the Santander Group, which offers through its Openbank digital banking access to 13 traded products (ETP) that offer exposure to crypto currencies or related companies.

While large Spanish banks are still wary of offering
crypto products, Spanish managers are seeking to quickly position themselves in what they hope will be a very profitable market. A&G Fondos launched, at the end of 2023, the first free investment fund aimed at digital assets, the first of its kind to be marketed in Europe. Later, in April of this year, Renta 4 joined the competition with a similar fund that also invests in digital currencies, with which it also opens the door to discretionary portfolio management clients.

Both funds share the same approach: they invest in publicly traded instruments with exposure to bitcoin, ethereum and, to a lesser extent, other secondary digital assets. Both investment vehicles — only available to professional investors and with a minimum entry of 10,000 euros in the case of A&G and 30,000 euros for Renta 4 — take advantage of ETPs to avoid taking direct responsibility for crypto custody, a particularly sensitive after the FTX scandal. At the same time, both managers specify, the funds provide clients with an “efficient and simple” option to gain exposure to cryptocurrencies, without the need to operate on new platforms. At the same time, they highlight the importance of “professional management” that protects the investor, often without specific knowledge of digital assets, against the siren song of meme cryptocurrencies.

This does not mean that large crypto platforms do not try to increase their reach beyond small savers. Bitpanda, one of the largest brokers crypto of European origin, launched at the end of January a service focused on the specific needs of high net worth, family offices and corporate treasuries. Bit2Me, the Spanish firm owned by Telefónica and BBVA, also presented its own service in May to attract investors with more resources, as well as corporate clients. At the moment, as the company has revealed, it has more than 4,000 registered companies, as well as more than 1,500 clients with balances above 100,000 euros.

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