Middle Eastern investors are embracing crypto the traditional way

Matthew Clapp is head of business development and asset management at EQONEX, a Nasdaq-listed digital asset financial services company

The wave of bearish volatility that has dragged down digital asset markets in recent months is not new to long-term observers. However, there is a distinctly different sentiment towards cryptocurrencies in 2022 compared to previous bear markets in 2018 and 2015. Back then, traditional investors had not yet begun to see crypto as an investable asset and tended to perceive the dramatic price drops more as a death knell for Bitcoin than as an inevitable downside to the periods of extreme bullishness that preceded them.

This time around, investors across the Middle East from traditional finance appear to be far less cautious in their stance on digital assets – even though the current bear market was preceded by a series of high-profile collapses, such as Terra’s UST and LUNA tokens and lending firm Celsius. Still, the market does not seem deterred, and demand for cryptocurrency products among investors such as high net worth individuals (HNWs) and family offices remains high. In June, Capgemini published its 2022 World Wealth Report, which found that among 2,973 HNW individuals, 71 percent had invested in digital assets, rising to over 90 percent among those under 40. Plus, the Middle East and North Africa (Mena) region was the fastest-growing market for crypto adoption over the past year, according to Chainalysis, signaling strong investor appetite for the asset class.

Clearly, the entry of affluent millennials and Gen Z participants into the market is playing a role, but the overall gloomy macroeconomic outlook may also be a contributing factor to the ongoing appetite for cryptocurrencies. Whatever the reason, some financial institutions have been more reticent than others to meet demand.

JPMorgan Chase CEO Jamie Dimon, for example, is famously anti-crypto, having recently doubled down on his skepticism during congressional testimony to US lawmakers. But during an earlier outburst, even he acknowledged that many of his customers held the opposite view and that his bank would eventually have to meet the demand.

Withdrawal of traditional financial products

Given the ongoing regulatory fog surrounding cryptocurrency in many major jurisdictions such as the United States, institutions and cryptocurrency operators offering digital asset services to investors are finding they must tread carefully to avoid excessive compliance and operational risk. Not only is it the fact that any offer must not fall foul of existing laws that regulate financial markets, but also that certain services, such as custody, involve significant investments in digital infrastructure.

As such, many providers are seeking ways to offer their clients indirect exposure to digital assets through vehicles such as exchange-traded products or derivatives. Nasdaq Dubai listed its first regulated exchange-traded digital asset-based fund last year. Using these traditional structures gives investors greater flexibility in managing both risk and volatility. Regulators have shown willingness to approve exchange-traded products such as EQONEX’s physically backed Bitcoin ETN, meaning they can be safely traded on regulated, globally recognized exchanges.

As such, these products are also liquidated more quickly than physically held Bitcoin during times of extreme volatility. Although a Bitcoin trade is very fast, the need to keep assets in secure cold storage often means they are not immediately available. Furthermore, without all the fixed costs associated with digital asset custody, exchange-traded products, structured products and other indirect exposure instruments can offer the potential for greater returns to investors, which in turn makes them more attractive to banks and other issuers.

A nascent market with growing competition

The high demand and relatively low market barriers for issuers willing to play ball with the regulators means that there is now a rapidly growing market for crypto-based exchange-traded products and other innovative investment vehicles. The FT recently highlighted one a number of new digital asset launches in Asia, underscoring earlier reports that the region was proving particularly impervious to the downturn in cryptocurrencies.

However, similar growth patterns have played out across virtually every area of ​​the cryptocurrency sector in recent years, including exchanges, institutional services, DeFi protocols and other segments. Based on the success of a few early entrants, many players rush into the market and it quickly becomes crowded with operators offering carbon copy variants of the same product. But there are always only a small handful of outstanding operators who rise head and shoulders above the rest.

At this relatively early stage, it is difficult to predict which of the current ETPs or issuers will become the sweethearts of the lucrative HNW individual and family office market in the Middle East. But given the priorities and preferences of this group, it seems most likely that it will be those crypto players who can demonstrate their commitment to regulation, with strong teams and superior products that will eventually break through to long-term success.

Even despite the rapidly increasing pace of adoption, it is still very early in the cryptocurrency journey for HNW individuals and family offerings as an investor class. They may see crypto as a more investable asset than several years ago, yet digital assets are still a relatively small portion of most investors’ portfolios. As such, firms that leverage traditional financial wrappers and exchange-traded products to maximum effect are poised to support further cryptocurrency adoption by this wealthy and highly influential group in the world’s fastest-growing crypto investment region.