When looking at the crypto fund universe in 2021, there are at least two significant takeaways from both the current data, as well as the future outlook: One is that even as the crypto fund market continues to grow at a steady pace, there still remains room for significant growth going forward; the other is that while ETFs make up just a small fraction of the fund market today, there appears to be no shortage of demand for the Securities and Exchange Commission to finally approve a crypto ETF for the U.S.
Putting the first takeaway into context, consider that the total number of global crypto funds has grown by an astounding 800% over the past five years, according to the 2021 Global Fund Management (GFM) report published by Coinbase, citing data from Crypto Fund Research (CFR). This expansion – driven largely by the launch of VC and crypto hedge funds between 2017-18 – also saw the total AUM of crypto funds nearly double year-over-year from 2019-20, with more than $36 billion in total assets at the end of last year.
In fact, of the 835 cryptocurrency funds that were in the global market as of Q1 2021, 426 were VC funds and 386 were hedge funds, according to the Q1 2021 Crypto Fund Report published by CFR. Private equity/other account for the other 23 funds, including a handful of crypto ETFs (though these obviously originated outside the U.S.)
And while the number of fund launches peaked in 2017 (291) and has fallen for three consecutive years to 66 in 2020, the number of crypto funds launched has exceeded the number that have closed for three consecutive quarters, with 24 launched in Q1 2021, compared to 13 that have closed.
However, while the total number of funds and the total AUM continue to grow exponentially (with a few blips here and there), only 5% of the recorded funds manage more than $100 million, according to Coinbase’s 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 shrink, according to CFR data.
So, with the crypto fund management space still poised for expansion, where will this growth come from? One obvious avenue will be the continued money flowing in from institutional investors as bitcoin, ethereum and other cryptocurrencies mature and consistently deliver steady performance; the other will be the introduction of ETFs into the U.S. crypto fund market.
Growth prospects
As noted in Coinbase’s GFM report, SEC Chairman Gary Gensler “is thought to be more sympathetic to the deeper integration of crypto into the financial system” than his predecessors. But – at least as of this writing - there are still regulatory hurdles to cross. (It’s important to note here that while there are mutual funds with exposure to bitcoin futures, they are not allowed to hold bitcoin directly because they are legally required to only invest in regulated products).
Speaking at the Aspen Security Forum in August, Gensler said that cryptocurrencies would need further regulation before the SEC could move forward with approving a crypto ETF – and more specifically, a bitcoin ETF, which has seen at least a dozen applications rejected – because the “asset class is rife with fraud, scams, and abuse in certain applications.” And to be sure, institutions within the crypto space are also seeking regulatory clarity as well, which would help to ease concerns over market manipulation, fraud and other crimes that put investors at risk.
But confidence remains high among many market watchers that a crypto ETF will get regulatory approval in the U.S. in either 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 nudge along regulators elsewhere as part of the initiatives to bring crypto into the financial landscape fully,” Coinbase wrote in its GFM report. “It will impose market surveillance, custody, and auditing requirements on the industry, offering a safer route into 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 its 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 U.S. and the only company to convert a bitcoin fund into an SEC-reporting company.
What’s especially noteworthy here is that Grayscale is committed to converting GBTC into an ETF once it is legally allowed to do so.
The institutional outlook
For institutional investors, having a trusted and secure custodian for their digital assets is absolutely essential to furthering their adoption of cryptocurrencies, including gaining exposure to the market through crypto ETFs. Additionally, many financial services businesses will likely turn to a third-party vendor that has a highly scalable crypto infrastructure-as-a-service to develop products for their clients.
As noted in its H1 2021 report, Coinbase’s institutional business saw growth in the first half of 2021 in both of its primary client segments: institutional investors, in which clients directly access the crypto markets via Coinbase prime broker; and its indirect introducing broker business, where other financial services businesses – including banks, broker dealers, and fintechs – leverage Coinbase prime brokerage infrastructure through APIs or white labeling in order to offer crypto capabilities of their own.
Coinbase plans to continue to invest heavily in its introducing broker business because it anticipates “that every financial services business will need to integrate crypto into its product suite to meet client demand, but very few will want to deal with the high costs and complexity with doing so,” according to its H1 2021 report. The company also launched Coinbase Prime in Q3, which is a fully integrated prime brokerage solution that allows institutional investors to manage the entire trade lifecycle - from execution through post-trade settlement to cold storage - on one unified platform.
There is little doubt that the crypto fund management market continues to grow and will only expand further once the SEC gives approval to crypto ETFs in the U.S. With so many financial institutions already lined up seeking approval of their bitcoin ETF products, the floodgates are likely to open on the crypto fund space once a regulatory green light is given.
For institutional investors, the challenges of growing their digital asset investments can be eased with a trusted platform that has a highly scalable crypto infrastructure, including experienced trading, coverage and client services teams built for professional investors. Crypto fund management is still in its early days; it’s good to have an experienced partner to help you navigate the future.
Coinbase Institutional provides integrated solutions that marry our advanced trading platform, custody, and prime services. Institutional investors have all the tools they need from staking and governance to secure cold storage via Coinbase Prime, our prime brokerage platform.
To learn more about Coinbase Institutional, please email us at: institutional@coinbase.com.
This material is not investment, tax, or legal advice. It is for informational purposes only, and is only intended for sophisticated investors. For more information about Coinbase, please visit www.coinbase.com/prime.