By Nicholas Cooper & Dr Hartmut Neff (pictured), Crypto Fund – The addition of crypto assets to the investment portfolio is on the rise among professional and institutional investors. What makes this move increasingly interesting for institutional investors? Swiss-based Crypto Fund AG, a subsidiary of Crypto Finance AG, explores the market with the advent of regulated business partners and crypto asset technology breakthroughs.
Opportunity in the crypto asset market
The crypto asset market saw its first major influx of investment, resulting in a price surge through December 2017, followed by the recent period of substantial public interest in crypto assets and blockchain. The recent drop in prices has not deterred the financial industry from investing, as seen in the growth in crypto fund assets under management. Last year’s inflow of financing is now being harvested to develop the innovative and disruptive technology. Three factors appear to be playing a role: positive regulatory signals, the arrival of institutional providers, and expected technological advancements – all significant for institutional players to enter the market.
The decreasing price volatility against the US dollar over the last six months indicates possible maturation in the industry. Lower volatilities during a period of stable prices can indicate an expectation of a positive turn in the market.
The positive long-term prospects for the crypto ecosystem continue. This presents the opportunity to invest at the currently deflated price points. Prices should reflect the long-term positive expectations and upcoming technological advancements.
Positive regulatory environment
Regulators around the world are taking crypto seriously, issuing guidelines and laws (such as Liechtenstein’s Blockchain Act and Japan’s crypto exchange regulatory announcements). Increasingly, the crypto world is open to regulation: it improves legal certainty and speeds up adoption.
As the crypto market evolves, so do industry best practises and standards. Fewer operational issues will occur on crypto exchanges with increased regulatory oversight, more professional custodian practices, and highly secure crypto asset storage. Insurance products are being released to cover risks in the event of compromises, as is necessary in traditional banking.
Regulators of asset management companies are increasingly embracing the crypto industry. Crypto ETFs and other similar collective investment schemes are edging closer to approval with the biggest regulators, such as the SEC. Crypto Fund AG is the first, and presently the only, Swiss crypto asset manager authorised by the Swiss Financial Authority FINMA under the Swiss Collective Investment Schemes Act.
Institutionalisation of the crypto industry
Institutionalisation has arrived. Crypto Finance AG, launched in 2017, has worked closely with FINMA in building a bridge between the traditional financial world and the emerging crypto asset market. Financial services professionals, including former UBS and Credit Suisse employees, and technology specialists back up CEO and co-founder Jan Brzezek’s team.
With recent institutional announcements, the larger players are now entering the market. The crypto fund assets under management increased significantly this year, counter to the substantial fall in crypto market capitalisation (as crypto prices fell). The indication: vast crypto fund inflows during 2018.
Technology as a market catalyst
Looking further afield, the potential for widespread crypto adoption is visible in financial services, healthcare, insurance, supply chain management, internet of things (IoT), wealth storage, and global settlement.
Crypto technology breakthroughs are expected in one to three years. The highest potential projects have achievable and impressive ambitions with professional development teams. Extensive manpower is being dedicated to finding solutions to current challenges, including effective decentralised governance protocols, faster transaction speeds and scaling systems, lower energy mining consumption, denial of service resistance, geographical disbursement solutions, and mining pool concentration safeguards.
Allocating crypto assets into portfolios
The broad crypto asset market exhibits low correlations with traditional asset classes such as equities, fixed income, currencies, and gold. The addition of crypto investments brings diversification and strengthens a portfolio, based on the long-term potential of this new industry. Crypto assets added to a portfolio as an allocation in an alternative investment quota can ensure an investor does not miss potential bull runs. This position could be considered as similar to an equity option without maturity.
Adding crypto to a portfolio should be considered as a long-term investment. Investors should review specific tax and legal advice in their jurisdiction.
Crypto investment fund vehicles
Using collective investment vehicles to gain crypto asset exposure brings the benefit of crypto experts and financial services professionals managing the products without the difficulties of direct investment. Crypto funds can also offer favourable liquidity terms, such as weekly Net Asset Values (NAVs).
Passive funds track indices, such as the Crypto Market Index 10, calculated by SIX Swiss Exchange AG, are constructed to represent the broad crypto market. Active fund products differ in investment style and objectives, such as a systematic approach using algorithmic filter analysis, to name but one example. Unregulated crypto funds often lack basic corporate governance, controls, and processes expected of asset managers. Most hold their crypto assets in self-custody. Third-party crypto storage providers with top-tier institutional storage infrastructure solutions are an essential requirement for any professional investor.
The crypto industry is moving towards institutional professionalism
According to Bloomberg: “Institutional investors are becoming more involved in the USD220 billion cryptocurrency market than many observers may realise”. The drivers of this increased investment include the growth of institutional partners available, expected technological breakthroughs, and supportive regulatory advancements.
As the importance of crypto assets grows and matures across many markets, the Swiss authorisation from FINMA for Crypto Fund AG is an important acknowledgement for crypto assets around the world. It allows professional investors a pathway to invest easily and transparently in the crypto industry.