Coinbase Report: Expect Growth in SEC-Approved Crypto Funds and ETFs Soon

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When looking at the universe of crypto funds in 2021, there are at least two important points to take away from both the current data and the outlook for the future: one is that while the crypto fund market continues to grow at a sustained rate, there is still room for significant growth in the future; the other is that although ETFs are only a small fraction of the fund market today, there is no shortage of demand for the Securities and Exchange Commission to finally approve a crypto ETF for the United States.

Putting the first takeaway in context, consider that the total number of global crypto funds has grown by 800% over the past five years, according to the 2021 Global Fund Management (GFM) report released by Coinbase, citing data from Crypto Fund Research. (CFR). This expansion due in large part to the launch of venture capital and crypto hedge funds between 2017-18 also saw the total assets under management of crypto funds almost doubling year over year compared to 2019-20. , with over $ 36 billion in total assets at the end of last year. year.

In fact, of the 835 cryptocurrency funds in the global market in the first quarter of 2021, 426 were venture capital funds and 386 were hedge funds, according to the Q1 2021 Crypto Funds Report released by the CFR. Private Equity / other account for the other 23 funds including a handful of crypto ETFs (although these are obviously from outside the US)

And while the number of fund launches peaked in 2017 (291) and fell for three consecutive years to 66 in 2020, the number of crypto funds launched exceeded the number that closed for three consecutive quarters, with 24 launched in first quarter of 2021, compared to 13 that closed.

However, while the total number of funds and total assets under management continue to grow exponentially (with a few bumps here and there), only 5% of registered funds manage more than $ 100 million, according to the Coinbases GFM report. , citing data from CFR. In other words, crypto funds remain relatively small; but the number of funds managing less than $ 100 million continues to decline, according to CFR data.

So, with the crypto fund management space still poised to expand, where will this growth come from? One obvious avenue will be the continued influx of money from institutional investors as bitcoin, ethereum and other cryptocurrencies mature and consistently deliver stable performance; the other will be the introduction of ETFs into the US crypto fund market.

Growth prospects

As noted in the Coinbases GFM report, SEC Chairman Gary Gensler would be more supportive of crypto’s deeper integration into the financial system than his predecessors. But at least as of this writing, there are still regulatory hurdles to overcome. (It is important to note here that although there are mutual funds exposed to bitcoin futures, they are not allowed to directly hold bitcoin as they are legally required to invest only in regulated commodities) .

Speaking at the Aspen Security Forum in August, Gensler said cryptocurrencies would need additional regulation before the SEC can move forward with the approval of a crypto ETF and specifically a bitcoin ETF, which has seen at least a dozen claims rejected because the asset class is plagued by fraud, scams and abuse in certain applications. And of course, institutions in the crypto space are also seeking regulatory clarity, which would help allay concerns about market manipulation, fraud, and other crimes that put investors at risk.

But confidence remains high among many market watchers that a crypto ETF will gain regulatory approval in the United States in 2021 or 2022, bolstered by the successful launch in Canada of three crypto ETFs in February – including the Purpose Bitcoin ETF. , the CI Galaxy Ethereum ETF, and the Purpose Ethereum ETF.

We believe Canada’s approval of Bitcoin ETFs will push regulators elsewhere as part of initiatives to fully integrate crypto into the financial landscape, Coinbase wrote in its GFM report. It will impose market surveillance, custody and auditing requirements on the industry, providing a safer path in the space for retail and institutional investors.

Meanwhile, Grayscale Investments, the world’s largest digital asset manager, selected Coinbase in 2019 as the custodian of its single-asset investment products and underlying digital assets, including Grayscale Bitcoin Trust (GBTC ). Grayscale launched GBTC in 2013, becoming the first company to launch a publicly traded bitcoin fund in the United States and the only company to convert a bitcoin fund to an SEC reporting company.

What is particularly noteworthy here is that Grayscale commits to converting GBTC to ETF once it is legally allowed to do so.

The institutional perspective

For institutional investors, having a trusted and secure custodian for their digital assets is absolutely essential to fostering their adoption of cryptocurrencies, including gaining market exposure through crypto ETFs. Additionally, many financial services companies will likely look to a third-party vendor that has a highly scalable crypto-as-a-service to develop products for their customers.

As noted in its H1 2021 report, Coinbases’ institutional activity grew in the first half of 2021 in its two main customer segments: institutional investors, in which customers directly access the crypto markets through prime broker Coinbase. ; and its indirect introductory brokerage business, where other financial services firms including banks, brokers and fintechs leverage Coinbase’s best-in-class brokerage infrastructure through APIs or a white label to to offer their own cryptographic capabilities.

Coinbase plans to continue to invest heavily in its introductory brokerage business as it predicts that every financial services company will need to integrate crypto into its suite of products to meet customer demand, but very few will be willing to deal with the high costs. and the complexity of doing so. , according to its H1 2021 report. The company also launched Coinbase Prime in the third quarter, a fully integrated, top-notch brokerage solution that enables institutional investors to manage the entire transaction lifecycle – from execution to settlement. post-trade through cold storage – on a unified platform.

There is no doubt that the market for crypto fund management continues to grow and will only develop after the SEC approves crypto ETFs in the United States. open to the crypto fund space once the regulatory green light has been given.

For institutional investors, the challenges of growing their investments in digital assets can be made easier with a trusted platform with a highly scalable crypto infrastructure, including experienced trading, hedging and service teams. client designed for professional investors. The management of crypto funds is still in its infancy; it is good to have an experienced partner to help you navigate the future.

Coinbase Institutional provides integrated solutions that combine our advanced trading platform, safekeeping and best-in-class services. Institutional investors have all the tools they need, from staking and governance to secure cold storage through Coinbase Prime, our premier brokerage platform.

To learn more about Coinbase Institutional, please email us at: [email protected].

This document is not investment, tax or legal advice. It is for informational purposes only and is intended for sophisticated investors only. For more information on Coinbase, please visit www.coinbase.com/prime.

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