How to Decrypt Bitcoin for Wall Street
The fluctuating price of bitcoin bears a recurring characteristic: true believers are hoarding the vast majority of bitcoin in circulation, waiting for the next wave of new disciples to push up its value by fighting over the rest.
This content was published on October 6, 2022 – 5:00 p.m
swissinfo.ch
This inevitably increases the price of most other cryptocurrencies, which follow on the coattails of bitcoin.
These waves of sudden increased demand have been fueled by ordinary people on the street and later by technology companies that have made large investments. Could another swell stem from institutional investors, such as hedge funds and asset managers?
Some cryptocurrency financial firms seem to think so, issuing so-called “Exchange Traded Products” (ETPs) that give investors exposure to cryptocurrencies without having to handle them. ETPs are traded on traditional exchanges and either rise 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 try decentralized digital currencies. For example, one of the world’s largest asset managers, Fidelity, is expanding its cryptocurrency services for clients while Goldman Sachs has begun to make inroads into the market.
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Crypto ETPs have been around for a few years. Bank Vontobel released the first such financial product in Switzerland in 2018. Since then, Switzerland has become a prime trading location. The SIX and BX Swiss exchanges traded CHF 6.5 billion in crypto-ETP trading in the 12 months to September 2022, according to a report from the Lucerne University of Applied Sciences and Arts.
New base in Zurich
There are other active crypto-ETP trading venues, notably Frankfurt, but several issuers have chosen Switzerland as their global or European base of operations, including FiCAS, Valor 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 high caliber financial and technological 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 does not have the same startup approach and willingness to take risks as Silicon Valley. That’s something we bring to the table. We are a Silicon Valley-style company based in Zurich.”
The crypto-ETP business concept is vulnerable to the extreme volatility of prices. Over the past 18 months, the price of bitcoin has increased more than tenfold before losing two-thirds of its value. In the same period, the value of assets under investment in 21Shares products rose from $25 million to $3 billion before falling 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 by the end of August.
Snyder and fellow co-founder Hany Rashwan remain optimistic about prospects despite the latest blood 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 the next Monday it was worth $3.5 million, purely due to market volatility,” said Rany. “Four years later, they are now bigger than some of the Swiss private banks and brokerages that people use to buy our products.”
In July, as the cryptocurrency market crashed in spectacular fashion, 21.co raised $25 million from London-based hedge fund Marshall Wace and other investors, pushing the group’s valuation to $2 billion. This valuation is based on “nine-figure” (at least $100 million) revenue last year, of which 21Shares contributed $32.6 million.
No panic
Rany echoed a common refrain among cryptocurrency enthusiasts that while volatility is a hallmark of the emerging asset class, its long-term trajectory is positive.
“We are enjoying the bear market [slump in prices]. The tourists have to leave, greater focus and discipline enters the space and you see more visible effects from real product innovation, he said.
Cryptocurrencies offer a deeper value than making investors rich by converting them into traditional currencies at the right moment. Cryptocurrencies are created to allow people to operate the underlying blockchains and to power independent financial systems for peer-to-peer payments and transactions.
But any asset that creates practical value, and therefore generates demand, will inevitably become a tradable asset. ETP issuers have entered this intersection between the worlds of traditional finance and crypto finance.
They are betting on hedge funds and asset managers driving the next wave of cryptocurrency adoption by making bitcoin and other cryptocurrencies more palatable to professional investors.
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