By Rohit Kulkarni, Managing Director of Private Investment Research at SharesPost
Just as stocks and bonds are essential components of a diversified financial portfolio, structured investments have been increasingly crucial to achieving an investor’s specific investment objective. Structured investments typically create a way for investors to express a bullish or bearish market view, hedge an existing position, or gain exposure to an asset category.
As the investor appetite for cryptocurrencies continues to rise, we believe the demand for structured crypto products will likely follow suit. However, structured products face several regulatory challenges. Nonetheless, we remain optimistic that any widespread acceptance of cryptocurrencies will also include structured products.
So far, the Securities and Exchange Commission has been cool to proposed crypto exchange traded funds (ETFs). After rejecting the Winklevoss Brothers’ Bitcoin ETF in July, the SEC recently opposed an additional nine applications for listings of similar investment vehicles. The agency also postponed action on two more proposed ETFs.
The SEC has consistently concluded that the proposed ETFs failed to demonstrate “the requirement that a national securities exchange’s rules be designed to prevent fraudulent and manipulative acts and practices.” The SEC says the decisions do not reflect an overall judgement on Bitcoin or Blockchain technology. Instead, the agency frequently cites the lack of “significant size” for cryptocurrency markets, which are necessary to deter fraud and manipulation.
Crypto products face a harsher reality abroad, especially in China, where regulators have already been scrutinizing cryptocurrencies. A year after the government banned initial coin offerings and shut down domestic exchanges, the government has imposed additional restrictions: censoring crypto accounts on the widely used WeChat messaging app, limiting crypto-transactions on Ant Financial, and blocking 124 offshore crypto exchanges. Additionally, the government has banned hotels, malls, restaurants, and office buildings in Beijing from hosting any activities that promote cryptocurrencies. Chinese regulators clearly believe cryptocurrencies pose a significant harm to investors.
Nevertheless, institutional investors are pouring money into crypto. We recently conducted a survey of investors and consumers to gauge their sentiments. Despite negative headlines, 59% of investors said they intend to increase holdings in cryptocurrencies over the next 12 months. Additionally, 32% said they believe Blockchain will likely disrupt asset management. However, a majority of our surveyed investors said volatility, security, and safety continues to concern them. We estimate crypto funds have raised or hope to raise $8 billion, according to our analysis of publicly available information of roughly 125 crypto funds with committed capital or major such announcements. This number will likely get bigger. As institutions continue to invest in crypto, they will inevitably create or require packaged investment vehicles for their portfolios.
So what’s next?
Shortly after the SEC staff opposed nine ETF applications, the agency released letters that said four commissioners, who are political appointees, would review those decisions. Though the commissioners ultimately upheld the staff’s decision on the Winklevoss ETF, the agency’s willingness to take a closer look at ETFs should inspire hope that structured crypto product may yet have a future.
We have also witnessed an increasing number of new digital asset indexed funds. The Coinbase Index Fund, which launched in June, provides investors a way to invest in all the assets listed on the exchange, weighted by market cap, totaling $250,000 to $20 million. Bitwise has announced it will debut three new indexes, in addition to the crypto index it currently offers, by the end of the year, each tracking different market segments. Institutions have also started providing crypto indexed solutions. Morgan Creek Capital Management recently partnered with Bitwise to create the Digital Asset Index Fund, an index fund based on the top ten digital assets, weighted by market cap. Overseas, German-based Iconiq Funds recently announced it will launch a series of digital asset index funds beginning in the last quarter of 2018.