With this, has come the rising popularity of exchange-traded funds, more specifically exchange traded products (ETPs), which includes the existing crypto products.
ETPs are a wrapper designed to give investors the ability to gain exposure within specific areas in the market using a vehicle listed on the stock market.
They have the ability to track different assets across a number of sectors.
Alice Liu, senior associate of cryptocurrency investments at WisdomTree, talks to FTAdviser in Focus about what ETPs can bring to crypto investment and the rising trend of these products.
She explains what sort of developments the industry could see over the next few years and how regulation can play a part.
FTAdviser: Can you explain the trend towards using ETPs as a vehicle for esoteric investments?
Alice Liu: We have been monitoring the global inflows into crypto exchange-traded products and seen this space achieving significant growth and traction since Q2 2021.
The cumulative flows for global crypto ETPs now stand at around $5bn, up from virtually nothing one or two years ago.
Both the cryptocurrency and Blockchain investment areas would require advisers to dedicate time and resources to build up the knowledge on these topics.As investors have shown interest in investing in crypto assets, ETPs represent a good route-to-market option allowing for convenient and safe access to this asset class.
Most crypto asset ETPs give investors institutional-grade trading and custody services, addressing investor concerns such as hacking or theft of the private keys, or not being able to access liquidity across various crypto exchanges. Most importantly, crypto ETPs can seamlessly plug in to existing trading and brokerage platforms.
FTA: How comfortable will regulators and investors be with crypto ETPs?
AL: If we decouple the underlying crypto assets with the product structure here, and analyse this separately, it could help in drawing out the most productive conclusions.
Regulators are generally comfortable with the ETP structure, and there is a sense of agreement that, as a regulated product, ETPs would provide better protection to investors when compared with direct trading on unregulated crypto exchanges.
FTA: What sort of product development might we see in these areas over the next few years?
AL: We can look at how commodities were first brought into the ETP structure, as a guide to what we might expect to see from a product development standpoint in future.
We have seen products created on single commodities backed by both physically held commodities, like gold and silver, and futures, taking either long or short positions. Then there were index solutions launched, both on broad commodities as well as tailored baskets.
In more recent years, we have seen enhanced strategies such as smart rolling, products with ESG overlays, etc.
For crypto, we could expect to see similar stories. The industry has seen several single-coin products backed by physically held coins or futures, taking long or short positions.
What’s more exciting is the next stage of product development which could include basket solutions with ETPs tracking a beta index, or thematic crypto index, or maybe actively managed strategies.
This area would add additional value to investors with portfolio management and crypto selection expertise delivered via an ETP structure.
FTA: How are advised clients likely to access crypto? How should they?
AL: Crypto ETPs can be easily implemented as part of an advised client’s multi-asset portfolio, whereby the adviser would have visibility of the asset allocation and can rebalance and incorporate the crypto exposure in client’s risk budgeting and investment policy statements.
A WisdomTree survey of retail investors conducted by Opinium, revealed that over 34 per cent of investors buy crypto assets via crypto exchanges, 20 per cent via online brokers, and only 18 per cent via financial advisers, in addition to other independent channels.
These results suggest easy access is key, but this approach could present risks due to potential of trading on unregulated environments.
FTA: Will advisers be more comfortable recommending ETPs or smart beta strategies that give access to cryptocurrency?
AL: If we are looking at crypto ETPs versus Blockchain themed equity funds, we can look at it from this angle. Crypto ETPs invest in native crypto assets, whereas blockchain funds usually consist of stocks from listed companies that are involved in blockchain technologies.
These could include producers, innovators, miners, users or other ecosystem participants. Stock market access fits into many of the more established compliance requirements.
However, much like investing in physical gold versus gold mining stocks, these are two different types of underlying assets, and hence would deliver different exposures and behave very differently.
Advisers could help their clients in these situations by getting up-to-speed.Both the cryptocurrency and Blockchain investment areas would require advisers to dedicate time and resources to build up the knowledge on these topics. The crypto industry is generally good with knowledge sharing given its community-driven setup.
One of our key focuses is to partner up with advisers and investors to support them on research and help them articulate crypto to their end clients.
FTA: Do you feel the regulator should be doing work on this? Why/why not?
AL: Regulators are increasingly looking into the crypto space to find the appropriate framework to govern the landscape. From the news and interactions that we have seen in the industry, regulators generally have the goal of protecting market integrity and protecting investors.
It takes time to understand this nascent asset class, and the speed of innovation within crypto means that there are continuously new developments both in terms of the technology as well as products and ecosystems.
WisdomTree has been actively engaging in many of these conversations and consultations with regulators.
We do believe that regulatory clarity will help the industry, as it gives legitimacy to the asset class and makes crypto more useful and investable.
FTA: How should advisers deal with clients' interest in crypto?
AL: Surveyed data has quoted an increasing amount of interest from the end clients who are looking to invest in cryptocurrency as part of a diversified portfolio.
Some even suggested their willingness to step outside the advisory relationship to gain access.
Advisers could help their clients in these situations by getting up-to-speed on the asset class and guiding them on their journey into crypto. In order to minimise capital risk, risk management and education should be a priority.
sonia.rach@ft.com
