Structured Products for Digital Assets

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Structured Products for Digital Assets

Many institutional investors cannot or do not want to invest in digital assets directly. To meet this demand, there are several products that enable participation in price trends without holding onto a private key. These structured products for Digital Assets include Exchange-Traded Notes (ETNs) and other financial products that we will take a closer look at in this article.

Börse Stuttgart, for example, offers several ETNs which mimic the price development of Bitcoin and Ethereum. Another financial instrument that allows investors to participate in price developments are certificates. The certificate from Bank Vontobel with Bitcoin as an underlying is, for instance, available at Börse Stuttgart and Börse Frankfurt.

In addition to structured products, investors can invest in regulated fund products that give exposure to digital assets, such as the alternative investment fund (AIF) offered by Postera Capital in Düsseldorf. The company was founded in 2017 and deals exclusively with crypto assets and blockchain. Postera is the initiator of the Postera Fund — Crypto I, the first regulated crypto fund in Europe. The fund invests directly in crypto assets such as Bitcoin, Ethereum, and Dash. Since its launch in April 2018, the fund’s investment universe has been steadily expanded and currently comprises 15 crypto assets. The portfolio is actively managed, with individual positions being over- or underweighted based on fundamental data, technical analysis, and AI-supported sentiment analysis. The fund is aimed at professional investors and is approved for sale in Germany, Liechtenstein, Great Britain and Switzerland.

Another fund offering an actively managed AIF in the DACHLI region is Immutable Insights’ hedge fund. The hedge fund applies proprietary on-chain-analytics to generate a trading signal for the first BaFin registered Crypto Hedge Fund from Germany — the Blockchainfonds I GmbH & Co. KG for professional investors only. Different from other funds, it does not hold Bitcoin but instead focuses on the underlying value of tokens and the potential of the applications on the Ethereum blockchain. The fund applies a very conservative risk management and aims to achieve superior risk-adjusted returns that are catering to the needs of fiduciary asset managers with a view on the overall portfolio allocation and balanced risk. It also applies its own proprietary anti-money-laundering and compliance detection analyzes, making it as safe and clean as possible to invest in the new asset class. The fund is up 20% year to date.

Crypto-Enabling Structured products for Digital Assets

As already implied in the service offerings above, some banks are also positioning themselves in the Banking-as-a-Service (BaaS) segment. For this purpose, these companies provide the regulatory and technical infrastructure for trading crypto assets. This allows other financial institutions to integrate these products into their existing offerings.

Already embedded as a BaaS platform in the German ecosystem for crypto assets is Berlin-based Solarisbank AG. Its white-label platform for digital banking services is implemented by companies like BSDEX, BISON, and Bitwala. Furthermore, Solarisbank AG founded the subsidiary Solaris Digital Assets GmbH in December 2019 to also provide the technical and regulatory infrastructure
for crypto asset custody.

Another infrastructure provider offering regulatory and technically compliant white-label solutions is the Bankhaus von der Heydt. With its experience in the structuring of financing solutions, Bankhaus von der Heydt now offers a digital platform for the issuance of security tokens, crypto custody, and fiat-on-ramp. The latter enables its B2B and B2B2C clients to trade crypto assets into euros.

Fidor Bank AG, which also provides BaaS, however, offers access to crypto assets for retail and B2B clients alike. Its solution for financial institutions enables trading of Bitcoin against the euro with SEPA transactions. Also, Fidor Bank AG offers corporate bank accounts for crypto exchanges as well as for investors and companies conducting ICOs.

TEN31 Bank, a venture of the fully regulated German WEG Bank AG, works on a bridge for payment processing between digital currencies and the euro. Together with its partner Salamantex, a provider for PoS terminals, consumers will be enabled to pay with, e.g., Bitcoin, while the merchant receives euros. Also, TEN31 partnered with Nimiq enabling its clients to trade crypto assets against the euro by using SEPA bank accounts. Both services are, nevertheless, still subject to regulatory approval.

Another bank actively working on innovative, blockchain-based solutions for the capital market is Bankhaus Scheich. In February 2020, Bankhaus Scheich declared the successful replication of a DAX share as a digital security users of the German crypto phone app within 1.5 years 100,000 + on the blockchain together with Cashlink and Finoa. Now, in August 2020, Bankhaus Scheich announced to offer trading of Bitcoin & Co. to professional investors in cooperation with the German crypto custodian Finoa. The service offering seeks to enable in-custody trading, without exposing clients to transaction and counterparty risks of multiple trading venues.

For the retail segment, several players can also be found. Here, offerings have been available for some years. Nevertheless, it can be assumed that increasing investor protection and more user-friendly products will be beneficial for the retail market in general. Via Germany’s oldest exchange bitcoin.de, for instance, retail clients can trade crypto assets in a regulated environment provided by Fidor Bank AG. While bitcoin.de provides the peer-to-peer marketplace and the custody of crypto assets, Fidor Bank enables the corresponding SEPA transactions for customers.

Also, BISON, backed by Börse Stuttgart, provides an application that aims at retail clients and offers trading of Bitcoin, Ethereum, Litecoin, and Ripple. As for its institutional counterpart BSDEX, the solution includes the partners Solarisbank AG and blocknox GmbH.

Another player targeting retail clients is Bitwala. In this offering, customers are required to set up a SEPA bank account with Solarisbank AG in order to trade Bitcoin and Ethereum. Also part of this cooperation is BitGo, which is responsible for the management of private keys. Bitwala also offers debit cards to its customers, which can be used by converting crypto assets into euros.

Statistics like the 100,000+ users of the German Crypto Phone App show, that the demand for such financial products is rapidly growing but also that there is a real need for custodial solutions to reach all parts of the financial landscape.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

Retail and Professional Investors in Germany’s Target Market

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Retail and Professional Investors in Germany’s Target Market

What is the actual number of people interested in cryptocurrencies? Are there any indications that the German target market is of a relevant size? Several studies have been conducted on these questions within the last few years. We would like to shed light on the results of these studies in this article and look at them in an intra-European context.

In 2018, the German retail bank Postbank surveyed 3,100 Germans and found that 29% of Germans believe that cryptocurrency is a desirable investment opportunity. This number is high given that the survey was conducted between February and March of 2018 when Bitcoin was in a bear market. The study found that 6% of respondents in the 18 to 34 year old group own cryptocurrencies and that 14% planned to buy cryptocurrencies during the next 12 months. This is in contrast with the 3% of the whole survey sample that owned cryptocurrencies.

A survey carried out half a year later by the German Consumer Centers of Hesse and Saxony found similar results to the Postbank survey. In this study, 28% of respondents from the age group 18 to 29 were interested in buying cryptocurrency. The survey polled 1,000 Germans in Hesse and Saxony.

Blockchain Research Lab conducted a survey of German cryptocurrency adoption in 2019 and found that 87% of Germans had heard about cryptocurrencies. According to the study, 24.8% of respondents had invested in cryptocurrencies. 14.1% owned cryptocurrencies at the time of the study, and 10.7% owned cryptocurrencies in the past. The overwhelming interest was in Bitcoin. Out of the 14.1% of respondents that held cryptocurrencies, 85% of the respondents were invested in Bitcoin. Ethereum was the second largest coin held by respondents (30%) followed by Litecoin (23%) and Bitcoin Cash (20%). The survey had a sample of 3,059. In the sample, German investors trusted Bitcoin.de the most, followed by Coinbase and Kraken. The average size of a respondent’s original investment was €2,546.

ING Bank also published a survey that asked 12,813 people across Europe what their perception of cryptocurrencies were. German respondents had a more friendly attitude toward cryptocurrencies than Austrians with 20% of Germans saying they found cryptocurrencies to be positive compared to only 13% in Austria. Interestingly, ING Bank found that 12% of Austrians wished that banks would offer cryptocurrency-enabled accounts.

In early 2020, the market research institute Intervista and Migros Bank in Switzerland published a survey showing that 13% of investors under 30 believe that Bitcoin and altcoins will play a more prominent role in their basket of savings. The survey also reported that around 7% of Swiss people have invested in crypto. The survey studied Swiss aged 18 to 55.

Source: Cointelegraph Research, Postbank, Blockchain Research Lab, Migros Bank, Official population estimates

To summarize the surveys, retail ownership of digital assets ranges from 6% in 2018 to 24.8% in 2019 in Germany and 7% in Switzerland. In Austria, the estimate is 12%. Taking the average of the two German surveys, the current size of the target addressable market for retail cryptocurrency in investment products is approximately 15.4% of the adult population aged 18 to 59. This is approximately 5.5 million potential clients out of German’s 46.05 million adults. Relying on the only survey of average investment amount that was conducted by the Blockchain Research Lab, this gives an estimate of an addressable market worth over €14 billion in Germany alone. The current size of the target addressable market in Switzerland is approximately 7% of the adult population or 343,923 people. The current size of the target addressable market in Austria is approximately 12% of the population aged from 18 to 59 or 657,766 people, and it is the second-largest addressable market for retail cryptocurrency in investment products in the DACH region.

In conjunction with improved technological solutions, companies are now offering institutional investors the appropriate setting for professional crypto trading without needing to hold on to private keys. The Börse Stuttgart Digital Exchange (BSDEX), for instance, targets financial institutions and is offering the first regulated trading venue for crypto assets in Germany. For its trading platform, BSDEX partnered with Solarisbank AG, which holds a full banking license and, therefore, handles the bank accounts, as well as blocknox GmbH, responsible for the custody of crypto assets. Currently, institutional investors can trade Bitcoin against the euro, and the addition of more digital assets is planned.

Following this figure, the target market for cryptocurrencies seems to be of a magnitude that should arouse the interest of retail as well as professional investors. A potential customer base of 5.5 million in Germany alone and another million potential customers in the other DACH countries is certainly a relevant figure.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

The Financial Landscape for Digital Assets

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The Financial Landscape for Digital Assets

How are investors in the DACH region accessing cryptocurrencies? What digital asset investment vehicles are particularly popular among professional investors? Which difference is there between the financial landscape in individual states within the DACH region? Questions like these play a particularly important role in a global context, for instance, when it comes to economic analyses for the various German-speaking jurisdictions.

The European Securities and Market Authority (ESMA) reported that investment in alternative investments across Europe was €4.9 trillion in 2019. According to Preqin’s 2019 study on alternative investments in Europe, Germany has €58 billion invested in alternative assets. The largest sector of Germany’s alternative investments is private equity and venture capital, accounting for 23.4%. This is followed by real estate (13.5%), hedge funds (12.2%), infrastructure (5.1%), and private debt (2.9%). Per adult capita, Germany’s investment in alternative assets is approximately €1,248. In comparison, Switzerland has approximately €60 billion in assets under management dedicated to alternative investments. Hedge funds are the most attractive investment vehicle for Swiss investors representing 24.9%. This is followed by private equity and venture capital (14.4%), infrastructure (12.3%), private debt (5.0%), and real estate (2.1%). Per adult capita, Switzerland’s investment in alternative assets is approximately €12,212. Despite Switzerland’s smaller number of potential cryptocurrency investors, the investment amount per adult capita in alternative assets is 10x higher in Switzerland than in Germany. This provides evidence that Swiss investors may have more of an appetite for digital assets.

In the USA, some institutional investors have already invested in financial products that give them exposure to digital assets. Two pension funds in Virginia including the Fairfax Police Officer’s Retirement System and Employees’ Retirement System invested $55 million (€46.2 million) in Morgan Creek’s cryptocurrency fund in October of 2019. Yale University invested in two cryptocurrency funds during 2018 including Paradigm’s $400 million (€336 million) fund and Andreessen Horowitz. The University of Michigan’s endowment also invested $3 million (€2.5 million) in the Andreessen Horowitz cryptocurrency fund. Other university endowments including Harvard, Stanford, Dartmouth, Massachusetts Institute of Technology (MIT), and the University of North Carolina have all invested into digital assets via various financial products.

This section discusses how investors in the DACH region actually gain access to cryptocurrencies and highlights the most popular crypto asset investment vehicles for professional investors in each region.

Financial Landscape in Germany

The recent developments in Germany show that financial intermediaries are heavily investing in blockchain infrastructure. In early 2020, over 40 German financial intermediaries applied for a license from BaFin to be allowed to take custody of digital assets. This represents over 2% of Germany’s 1,800 banks. The license costs approximately €175,000 which indicates that many banks are banking on blockchain-based systems becoming the infrastructure technology of future financial markets. For this reason, the legislator is creating the necessary regulatory requirements and engaging in discussions that will decisively shape the financial market of tomorrow. Regarding the development of the necessary regulatory framework for digital assets, two aspects stand out. First, in December 2019, crypto asset custody was incorporated as a financial service in the German Banking Act (KWG) and, therefore, requires authorization from the financial market authority, BaFin, since January 1, 2020. Second, the German legislator published a draft bill in August 2020, which intends to abolish the mandatory paper-based certificate for securities. This development can be regarded as revolutionary — as it signifies a break with a system that is over a hundred years old.

However, besides the regulatory development, companies that actively offer products and services are the foundation for driving the adoption of blockchain technology. For this reason, we provide an overview of the companies in Germany that enable institutional investors to access crypto assets, such as Bitcoin and Ethereum. The analysis shows that the current market is already more fragmented than one may think.

The German legislator has created a regulatory framework that enables financial institutions to invest in crypto assets. At the same time, several companies and banks have also set up the appropriate technical infrastructure for the professional trading of Bitcoin & Co. In sum, this leads to an increased and more differentiated offering around crypto assets. Financial services in the crypto segment have, for some time, included instruments which, for example, reflect the price of Bitcoin or market places for retail investors. Now, however, fully regulated trading venues for professional investors like BSDEX are emerging. Also, some banks are establishing themselves as a BaaS platform. Solarisbank AG and Bankhaus von der Heydt, for instance, provide other financial institutions with the regulatory and technological infrastructure to enable access to crypto assets for their customers. It will be exciting to see how the market develops, given the fact that BaFin will issue first licenses for crypto custody later this year.

How interesting, then, is the German target market for professional investors and what is the difference between it and the Austrian or Swiss markets? We will explore this question in the next part of this series, with the Swiss market in particular being an interesting object of observation.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

Pension Funds and Investments in Digital Assets

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Pension Funds and Investments in Digital Assets

In the previous article of this series, we spoke with Stefan Andjelic from Raiffeisen Bank International (RBI) about Digital Assets. In this week’s installment, however, we wanted to look at this topic from a different angle, which is why we talked to Professor Dr. Michael Hanke from the Stiftung Personalvorsorge Liechtenstein.

Bringing a different perspective to the discussion, Professor Dr. Michael Hanke from the Liechtenstein-based pension fund explained that although regulations are not holding them back from investing in digital assets, there are other problems. Hanke points out that pension funds invest on the behalf of pensioners, but they have no way of gauging what the pensioners want them to invest in unless the pensioners actually call up on the phone or send an email requesting their pension to invest in crypto assets.

“Pension fund management is different from other asset management, like fund management, because with funds, you manage the money of clients that have voluntarily selected to invest in your strategy, so you know that they are okay with your asset allocation and strategy.”

— Dr. Michael Hanke, Stiftung Personalvorsorge Liechtenstein

The general public is still very skeptical about digital assets. If pension funds were to invest in assets that are still viewed critically in the eyes of the general population, they risk damaging their reputation, especially if something goes wrong. After all, pensioners cannot choose their pension fund themselves — the choice is made by the employer — which is why this duty of care is required. Hanke also discussed how pension funds in Liechtenstein are not held back from investing in digital assets by regulators. As a second tier pension fund in Liechtenstein, the laws that impact them are set at the federal level in Liechtenstein.

Pension funds, in particular, have another argument against digital assets: Apart from the liquidity that an asset class has to provide to a pension fund, they invest with a very long time horizon. However, the crypto world still seems to be characterized by short-term hypes, rapid incidences of success but also sudden loss stories. In this sense, according to the perception on the part of
pension funds, the world of digital assets does contradict the long-term view of pension funds.

Stiftung Personalvorsorge Liechtenstein is managing CHF 1.2 billion, and Hanke says it would take between 18 months to 24 months before they could actually invest, if they decided to invest, due to the administrative processes that exist when adding a new investment.

Source: Cointelegraph Research

Not being held back by regulations was also echoed by the survey respondents. Rather, asset allocators felt more
constrained by their own employer than by government policies.

How do these figures from the pension fund segment fit into the overall financial landscape? The European Securities and Markets Authority (ESMA) reports that the number of investments in alternative assets across Europe was EUR 4.9 trillion in 2019. We will take a closer look at this figure and its distribution in our next article.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

RBI Sees Potential in Digital Assets

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RBI Sees Potential in Digital Assets

We spoke to Stefan Andjelic from Raiffeisen Bank International (RBI) about his views on digital assets for our report. This interview was one of eleven case studies with investors at pension funds, banks, insurance companies and family offices that were conducted via phone call and in addition to the survey that was sent to all professional investors registered in German-speaking countries. While most of our interviewees wished to remain anonymous, Stefan Andjelic and others allowed us to release statements from the interview.

RBI has over 16.7 million customers, more than 46,000 employees, and €152 billion in total assets. Mr. Stefan Andjelic from RBI’s Blockchain Hub accepted to be interviewed by Professor Dr. Alfred Taudes from the Vienna University of Economics and Business for this report. He discussed with us how the digital asset market no longer refers only to Bitcoin, but rather has expanded into a broad array of assets. He also mentioned that as investors are becoming more informed about the potential of this emerging asset class, they are not being as easily persuaded by the negative connotation that traditional media usually attaches to cryptocurrencies.

“As investors are becoming more informed about the potential of this emerging asset class, they are not being as easily persuaded by the negative connotation that traditional media usually attaches to cryptocurrencies. Contrastingly, they also assess the potential that digital assets and blockchain technology in general can bring to society in the long term.”

— Stefan Andjelic, Raiffeisen Bank International

Although RBI is not currently invested, Andjelic feels positively about digital assets. As someone working in the field, Mr. Andjelic sees the potential for digital assets to be offered by incumbent financial players as an alternative investment vehicle that would allow them to create new streams of revenue. From a purely technological point of view, he also believes that digital assets can be a trigger for many traditional fields of finance to improve in the future.

When asked why RBI has not invested in digital assets yet, Andjelic said that the lack of regulatory clarity around what services financial institutions are allowed to offer in this field is still a major barrier. That said, there are still a lot of compliance topics to be clarified in these regards.

Once the regulatory framework related to digital assets is established, either by local jurisdictions or on an EU-level, financial institutions will be able to accurately assess the opportunities in this field and potentially invest in digital assets. On that note, the European Parliament is currently working on a digital assets framework. According to their timeline, in Q4 of this year, a framework should be in place.

Regarding timeline and which types of digital assets RBI would be interested in, Andjelic says, “I believe there is a much higher likelihood that we as a financial institution, once there is a full regulatory clarity, would initially focus on tokenized traditional assets, such as tokenized commodities, stocks, funds, etc. Potentially, we might also decide to offer some of these products ourselves based on both internal business decisions and a market demand.” RBI currently has 1% of their assets under management in alternative assets, which in absolute terms, equals to approximately €1.5 billion.

If RBI were to invest in crypto assets, several key decisions would need to be made. For instance, RBI would need to decide on whether the entity would aim to invest directly and store the digital assets itself, or would do so by teaming up with third-party service providers. In addition, if RBI decides to start offering crypto assets to its clients, then the decision would have to be made whether the bank wants to build the entire infrastructure on its own or to team up with an already existing crypto assets provider
in the market.

One option on how such constellation would work is that the third-party service provider would be connected through APIs to RBI’s infrastructure, while RBI’s banking platform would be the face to its clients. In such a scenario, the digital assets would be stored by the service provider instead of RBI. This would allow RBI to ensure that clients can only buy and sell their digital assets through Raiffeisen banking platform without being able to transfer them outside of the ecosystem. This would help Raiffeisen keep control on whether these digital assets are being used for any kind of illicit activities. RBI did make a successful venture capital investment into Bitpanda GmbH, via the SpeedInvest venture capital fund. Bitpanda is a licensed digital asset exchange operating in multiple countries across Europe.

In addition to Stefan Andjelic, we also interviewed Professor Dr. Michael Hanke from the Stiftung Personalvorsorge Liechtenstein, who allowed us to publish his statements. He brought in a different perspective, as other challenges are relevant for pension funds. This will therefore be the topic of our article in the next week.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

Why do some investors shy away from “risky” Digital Assets?

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Why do some investors shy away from “risky” Digital Assets?

The number of potential risks surrounding Digital Assets is relatively high, but risk in and of itself is not an absolute criterion for exclusion for financial institutions. We asked institutional investors about their opinion on risky Digital Assets and about how they evaluate the associated risk. Here are their answers:

Several of the asset managers in the survey mentioned that digital assets are too risky for them. However, financial institutions already invest in risky investments in the traditional financial markets, such as insurance-linked securities, sub-prime mortgages, emerging market treasury bonds, junk bonds, and much more.

Cyber-Crime and Fraud

Source: Cointelegraph Research

Operational Risks (e.g. Technological risks)

Source: Cointelegraph Research

So why are digital assets different? According to some respondents, in the traditional world, there are indeed investments that are risky. However, they are part of the traditional system and, therefore, cannot fall to zero without causing fundamental problems for the financial system as a whole. Digital assets, on the other hand, deliberately exist outside the traditional world, which is their purpose. Consequently, they are even riskier. Essentially, the asset managers are saying that traditional assets are too big to fail, the central bank and government gives them an implicit safety net in the lower-bound of the price of the asset. However, if a large financial intermediary supports digital assets and digital assets fail spectacularly, the government might actually let that business fail just to show what happens when you invest in a technology that challenges the government’s monopoly on money production and monetary policy.

“Investors are well served when innovation flourishes. I recognize that innovation involves risks, but it is investors who should get to choose the winners and the losers of the market. Regulators should not impede investor choice; rather, they should ensure that investors have access to accurate disclosures about the range of available products, including their risks.”

— Peirce, Securities Exchange Commissioner

Market risks (e.g. Volatility)

Source: Cointelegraph Research

Asset managers were asked to rate the importance of perceived risks when investing in crypto assets; the possible risks were the following: market risks (e.g. volatility), liquidity risks, operational risks (e.g. technological risks), cyber crime and fraud, and regulatory risks. All of the risks mentioned are in the “important spectrum” of the charts. However, the most important risk for those surveyed was regulatory risk, as almost 80% of the sample fell in the “important region” of the graph. With approximately 71% and 70% of responses in the “important region”, market risk and liquidity were ranked as the second and third most important risks, respectively. Operational and cyber crime risks have the same number of responses in the “important region” (~ 68%).

Liquidity risks

Source: Cointelegraph Research

A specific risk was mentioned that is not related to digital assets, but rather to the bank’s entire business model. Some banks fear that if they offer bank accounts to blockchain-based companies and offer clients the ability to invest in digital assets, they would lose their US dollar correspondent banks. This is a relevant concern as some banks have already lost their US dollar correspondent bank because they moved into the digital asset space. One respondent mentioned that their correspondent bank softly warned them that if they were to invest in digital assets, their banking relationship with the correspondent bank would be damaged or even terminated. It’s probably not a coincidence that these correspondent banks have the most to lose if digital assets eclipse the dollar.

Layering in money laundering is the process of making the source of illegal money as difficult to detect as possible by progressively adding legitimacy to it.

Regulatory Risks

Source: Cointelegraph Research

“If cryptocurrencies fail to provide easy liquidity, then they fail as mediums of exchange, one of the principal roles of money.”

— Michael Parsons, Former Cardano Foundation Chairman

For many institutions these risks are already outweight by the benefit of accessing a new revenue stream and they are therefore already invested into this asset class or they are at least planing to do so. We spoke with Stefan Andjelic from Raiffeisen Bank International and will present his insight into this topic in next weeks article.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

Institutional Investors and Blockchain Education

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Institutional Investors and Blockchain Education

Most professional investors can point to a formal education when it comes to their expertise in finance. This formal education, however, does not cover information about the Blockchain technology and Digital Assets. It is therefore of importance for institutions venturing into this new industry sector, to educate their employees first. For our report we asked them about their approach to Blockchain education and want to present this information here.

When asking about how financial intermediaries learn about blockchain, the highest ranked sources included encouraging employees to research the topic during working hours and an individual within the firm is spearheading the internal dialogue. Participation in conferences and webinars on crypto also promotes interest in the subject.

There is also a general openness to educational training concerning digital assets, but the survey participants generally do not rely on hiring external consultants or attending university courses in order to learn more.

Source: Cointelegraph Research

Digital Assets for me, but not for thee

Several of the case study respondents stated that they had privately invested in Bitcoin and other digital assets, while their institution had not yet made any direct investments. However, the majority of the respondents had a high level of decision-making ability within their firm.

A possible explanation for this can be that asset allocators are investing with more risk aversion when investing on the behalf of others than when investing their own wealth.

Source: Cointelegraph Research

The majority of the respondents had a master’s degree or above in formal education.

QUESTION: What level of education have you completed?

Source: Cointelegraph Research

Education about the Blockchain technology behind Digital Assets is not only important when it comes to choosing an asset to invest in, but also when it comes to safely handling this asset. These technological risks around purchasing and storing an asset can prevent an institution from investing into this new asset class. In the next article we will take a look at these risks to understand what companies fear the most.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

Who invests in Cryptocurrencies?

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Who invests in Cryptocurrencies?

It will surprise no one to hear that a growing number of institutional investors have already invested in cryptocurrencies with increased global awareness and crypto marketing. But which institutions are we talking about here? This is a crucial question when it comes to accurately classifying the scope of this statement, since the term “institutional investors” covers a very wide range of institutions.

Multiple types of professional investors responded to this survey including trusts/foundations, small asset managers (less than €100 million), medium asset managers (between €100 million and €1 billion), large asset manager (above €1 billion), insurance companies, pension funds, high-net-worth individuals, family offices, and banks. The majority of respondents are small asset managers and high-net-worth individuals, both of whom account for about 32% of the total respondents.

Smaller asset allocators, such as family offices and boutique wealth management companies, are more likely to invest in digital assets than larger financial service providers, such as banks and pension funds, according to the survey results. All 14 of the small asset allocators and family offices responded that they already own or plan to own digital assets in the future. This is compared to zero out of the two pension funds, one out of the three insurance firms, and two out of the six banks that were surveyed.

Many banks stated that they would like to offer their clients the ability to buy and sell digital assets; however, the decision that needs to be made by the C-Suite executives is whether to build up their internal infrastructure or outsource the trading and custody to a third-party broker or exchange.

Question: What type of investor is your company?

Source: Cointelegraph Research

Percentage of Each Investor Group that Owns or Plans to Own Digital Assets

Source: Cointelegraph Research

Using Existing Infrastructure or working with a Broker to Invest in Cryptocurrencies?

Source: Cointelegraph Research

For example, the Swiss giant in core banking systems, Avaloq, was mentioned multiple times by respondents. Avaloq is offering trading and custody solutions for investing in digital assets. If a bank buys the Avaloq digital asset module, the ability to invest in digital assets could be expanded to the bank’s entire customer base, and retail clients would even be able to buy and sell via their e-banking and mobile-banking applications.

However, the banks said they are hesitant to purchase software solutions to bring digital asset investing to their clients. The infrastructure and services are considered to be too expensive still. Custody solutions in particular are comparatively expensive. The main reason for this is believed to be a lack of competition. The banks would need to have significant demand for digital assets from their clients in order to justify the expense. As more traditional players enter the digital asset industry, prices should fall in this regard.

Information is of very great importance for investors in cryptocurrencies. Because of the highly speculative nature of this sector, weighing the risk is only sufficiently possible when a given project has been examined from all sides. This expertise is something that many institutions have yet to acquire. We will take a closer look at this process in the next article of this series.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

Why and how are companies investing in Digital Assets?

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Why and how are companies investing in Digital Assets?

Digital Assets are a new and very specific group of assets that is increasingly interesting to investors for many different reasons. What are these reasons and is there one specific reason that dominates our survey? This is a question, that we will look at in this article. Another question that may be interesting to other potential investors is the question of ‘How?’ the surveyed companies have decided to invest in digital assets. Because this class of assets is new, the ways of investing also differ from more traditional assets.

According to the survey results, the most important consideration for investing in digital assets is their risk-return ratio, as 53% of respondents rated this characteristic as “highly important”. Most of the responses to “diversification” and “my company is convinced that the technology will be important in the future” are clustered in the middle and slightly skewed to the right of the importance spectrum, meaning that these factors are moderately important. Notably, the survey shows that clients requesting digital assets is not very relevant to the asset managers’ decision to invest in these assets. As one respondent pointed out, clients requesting digital assets would be their number one reason for investing, but so far, none of their clients had requested digital asset exposure.

Source: Cointelegraph Research

Professional Investors prefer Direct Investment

The target group for blockchain-inspired financial products include pension funds, insurance companies, university endowments, high-net-worth individuals (HNWI), family offices, asset managers, banks, and fund of funds from around the world. Usually, these investors are asking for a regulated and easy-access approach to crypto exposure. Some of them want to invest in a new asset class with a great risk-return profile, others want diversification. There are many regulated investment products that give investors exposure to digital assets including long-only single asset or index products, derivative products, bank accounts for prop desk trading, and much more. This report found that professional investors prefer to invest directly in digital assets by buying them on an exchange. Interestingly, professional investors prefer to buy a regulated alternative investment fund before using a broker.

Question: What is your company’s ideal way to gain exposure to crypto assets?

Source: Cointelegraph Research

Digital Asset Service Providers

When asked about their use of specialized services for digital assets, respondents were most interested in data. 62% of respondents are interested in using data on digital assets at their company. Leading data providers in the digital asset industry include Coinmetrics (also sold by Messari), Coinmarketcap.com, and Cryptocompare. However, closer to home in Europe, Santiment and IntotheBlock also provide data on a monthly subscription basis. The next most sought after service is trading of digital assets on a digital asset exchange. In the German-speaking region, the only digital asset exchange owned locally is Bitpanda, which is headquartered in Austria. In Germany, Bitcoin.de is a peer-to-peer exchange, which is mostly used by retail investors.

However, there are several exchanges that serve Europe including Kraken, Binance, Bitfinex, Bitstamp, and Crypto.com. Over half of the respondents (54%) are interested in using an over-the-counter desk for the digital asset transactions. The largest OTC-desk operating in Europe is B2C2, based in London. Many brokers in the German-speaking countries offer over-the-counter services but use B2C2 or Cumberland for final execution. Notably, 48% are interested in using smart order routing software. Smart order routing software includes companies such as Blocksize Capital, based in Frankfurt, and CoinRoutes, based in the US.

Source: Cointelegraph Research

In this graphics we are looking at all investors that participated in our survey indiscriminately but this does not paint the whole picture. Behind every number there is a company of different size and investment volume. Next week we want to go deeper in the individual numbers and look at how much the size matters.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

What are Digital Assets?

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What are Digital Assets?

What are digital assets? Digital assets, or cryptographic assets, are tradable and digital representations of value that rely on decentralized consensus mechanisms for settlement.

According to the Basel Committee on Banking Supervision, the three distinguishing factors of cryptocurrencies are their digital nature; their use of cryptographic primitives, such as hash functions to verify the integrity of the data and symmetric encryption to create public and private keys; and decentralized record keeping and decision making.

Although there are over 7,000 cryptocurrencies listed on Coinmarketcap.com, not all of them serve the same purpose. Some are volatile digital currencies, such as Bitcoin, others are stablecoins that are pegged to the dollar, such as Tether. Generally, crypto assets fall into three categories including fungible digital currency, non-fungible tokens, and security tokens. Cryptocurrencies, stablecoins, and Central Bank Digital Currencies (CBDCs) are all forms of digital currency. Digital currency can also include online bank deposits issued to customers by banks, such as UBS or Deutsche Bank. The possession of digital currency often creates a legal claim against the electronic money issuer. However, this is not often the case with cryptocurrencies. In addition to fungible digital currency, non-fungible tokens can be used to represent unique assets, such as the Mona Lisa painting. Finally, security tokens often represent investment contracts, and they are regulated by securities laws.

Source: Cointelegraph Research

In addition to stablecoins pegged to fiat currencies, another class of tokens is gaining traction, whereby each token represents a commodity. For example, CACHE is a provider of regulated, transparent and redeemable tokens backed by gold stored in accredited vaults around the world. CACHE uses GramChain, a revolutionary new Proof of Reserve system, that enables the public to view photographs and see real-time status updates for each bar in each vault. CACHE provides fast, flexible redemption at scale with the option to sell the underlying gold for fiat currency. Based in Singapore, CACHE’s partners include vaults and gold dealers such as Brink’s, Dillon Gage, Loomis, Silver Bullion, and The Safe House as well as custody provider Onchain Custodian and digital asset exchange Bithumb Global.

The CACHE team draws on decades of experience in the precious metals and vaulting industry as well as legal, compliance, blockchain and cryptocurrency expertise. Each CACHE Gold token is backed by one gram of pure, investment-grade physical gold. CACHE Gold tokens can be redeemed for physical gold at any time. In amounts as small as 100 grams, redeemed gold can be sold for US dollars, shipped to the token holder’s address or collected in person at select vaults. Token holders have full control over their assets. No centralized third party can freeze or confiscate tokens. CACHE Gold tokens are deployed on the Ethereum public blockchain using the ERC-20 token standard. Bithumb Global and Bittrex Global both enable CACHE Gold token trading.

As these examples show, so-called “digital assets” are a very complex type of investment which, contrary to widespread public perception, cannot easily be reduced to a common denominator. The same also is true for the investors, because they are having different approaches and expectations of this new market. These aspects were also covered in our report, and next week we will make the findings available to our readers here on this blog.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

When are Investors buying Digital Assets and which do they choose?

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When are Investors buying Digital Assets and which do they choose?

Throughout Europe digital assets enjoy a great popularity among investors. Due to the significant price changes of individual assets in recent years, however, the timing of investments is an important factor in assessing the success of the individual investors. This article therefore aims at finding out when the investors we surveyed first started to invest in digital assets and which ones they primarily focused on.

The majority of investors gained exposure to digital assets for the first time during the past two years. Nearly 31% of those surveyed invested in crypto assets in 2018 — after Bitcoin’s all-time high in mid-December 2017, when the price was almost $20,000 per coin and Bitcoin had a $334 billion market capitalization.

Question: What was the first year your company invested in digital assets?

Source: Cointelegraph Research, Bitcoin average yearly price data from Coinmarketcap.com

An important observation is that institutional investors that have invested in digital assets have distinctly different portfolios compared to ones that have no exposure to this asset class. Digital asset investors have significantly fewer bonds, more commodities, and more cash reserves than investors with no exposure to digital assets. This is in line with the ethos of the industry — lower trust in government bonds, higher trust in sound money, and growing cash reserves in expectation of a recession.

Average Asset Allocation of Institutional Investors

Source: Cointelegraph Research

Cryptocurrencies are more interesting than Stablecoins and Security Tokens

Bitcoin and Ethereum are still the most dominant cryptocurrencies. Around 88% and 75% of respondents exposed to cryptocurrencies have invested in these cryptocurrencies, respectively. Respondents have a clear preference for Bitcoin and Ethereum, as only 31% have invested in Litecoin and XRP. A quarter of the respondents answered that they had invested in “other cryptocurrencies”. Tezos, EOS, Stellar, Binance Coin, Cardano, Bitcoin Cash, and Bitcoin Satoshi’s Vision were among some of the other cryptocurrencies mentioned.

Question: Which types of digital assets has your company invested in?

Source: Cointelegraph Research

Stablecoins have become the most highly traded digital asset when measured by daily exchange-traded volume. On-chain trading activity grew over 800% between April 2019 to April 2020. However, only 19% of respondents own stablecoins, indicating that institutional investors may not be the dominant force responsible for stablecoin daily trading volumes. Notably, 31% of investors that have exposure to digital assets answered that they have invested in security tokens. This indicates that security tokens are on the radar of professional and qualified investors. Although venture capital was not a multiple choice option, two banks that manage over €350 billion in total mentioned that although the financial institution they work for has not invested directly in digital assets, they have invested in the equity of blockchain-related startups.

The European Union rolled out negative interest rates in 2014, and Switzerland has had them since January 2015. As Fidelity’s report on institutional demand from earlier this year pointed out, a common objection against investing in gold and Bitcoin is that they don’t produce an annual yield. However, in the current environment, these assets can help investors protect their wealth from inflation and negative interest rates.

Future Demand

Among the 64% of investors who currently do not have cryptocurrencies in their investment portfolios, 39% plan to add them to their portfolio eventually. A quarter of the professional investors plan to buy cryptocurrencies at a later stage, and 14% of them plan to do so in the next 12 months.

Question: Is your company planning to invest in the future?

Source: Cointelegraph Research

Regarding the future demand for cryptocurrencies among professional investors, Bitcoin and security tokens are the assets in which investors are most interested. Surprisingly, there is more interest in security tokens and stablecoins amongst institutional investors than in cryptocurrencies such as Ethereum and XRP. This may be explained by the regulated nature of security tokens, as investors’ assets are often ring-fenced on the balance sheet of the issuer and rights in case of insolvency are explicitly mentioned in the prospectus. Furthermore, disputes can be settled by courts and contract law that the digital asset space is still building precedent for.

Question: Which digital assets would your company be interested in investing into in the future?

Source: Cointelegraph Research

After we have now dealt with these specific figures, we want to take a step back in the coming week, because some people will certainly ask themselves the question what exactly is meant by digital assets. The page Coinmarketcap.com lists more than 7000 different “cryptocurrencies”, however the differences between the entries could not be more substantial, which is the reason why we need a clarification.

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

Professional Demand for Digital Assets

Crypto Research
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Professional Demand for Digital Assets

Throughout Europe, investors have already invested millions of Euros and Swiss Francs into digital assets. Without a doubt, this is of significant importance for the economy in general and the crypto sector in particular, since these investors also play a major role in price movements. However, there are still only a small number of reports that systematically assess the demand for cryptocurrencies.

The first study was not focused on the German-speaking countries, and the second has not been published yet. Between November 2019 and early March 2020, Greenwich Associates under the auspices of Fidelity Digital Assets, Fidelity Center for Applied Technology, and Fidelity Consulting interviewed almost 800 investors across the U.S. and Europe.

Across the U.S. and Europe, 36% of the survey’s 774 respondents said they own cryptocurrencies or derivatives. The results show that over a third of institutional investors own digital assets. According to the survey, European investors generally have a more progressive view of digital assets, made evident when comparing the responses across all categories. Interestingly, this study found the same result: 36% of the survey’s 55 asset allocators said they have exposure to cryptocurrencies in the portfolio already.

The one survey that has targeted institutional demand for cryptocurrencies in the DACH region is BaFin’s survey of crypto asset derivatives. The German financial market regulator conducted a survey in late 2019; however, they have not published the results yet. In the survey’s preliminary research report, BaFin reported that there has been enormous growth of certificates that hold digital assets and contract for difference trading. Over 1,000 different certificates are on the market that have exposure to digital assets, and contracts for difference trading volume grew from €10 billion a month in August of 2018 to over €15 billion a month by January of 2019.

This study marks the first comprehensive survey of institutional investors on the topic of digital assets ever conducted across the German-speaking regions. The analysis contains key highlights of the survey’s results in addition to commentary from Crypto Research Report and Cointelegraph Research. Our experience combined with the proprietary dataset drives the unique perspective on the industry’s trends presented in this report.

Methodology

This survey had 55 responses from professional investors across the German-speaking countries including 44 online interviews and 11 case studies via telephone. Respondents included traditional banks, asset managers, and pension funds. This report focuses on buy-side, not sell-side asset allocators. Therefore, we did not send this survey to crypto funds that are invested 100% in digital
assets. The goal of this report is to gauge the demand for digital assets from traditional financial intermediaries.

The survey was delivered via email to all registered professional investors with BaFin (Germany), FMA (Austria), FINMA (Switzerland), and the FMA (Liechtenstein) between the months of June to September of 2020. With the help of local banking associations, the survey was also sent out to the members of the BVI Deutscher Fondsverband and BAI in Germany, the Austrian Bankenverband, the Liechtensteinischer Anlagefondsverband, and members of SFAMA in Switzerland.

The majority of the respondents came from Switzerland (16) followed by Austria (10), Germany (7), and Liechtenstein (6). When sorting the survey results by country, the respondents from Switzerland managed the most assets with €278 billion. Austria’s respondents worked in firms with the highest headcount. The majority (83%) of the respondents worked in firms with less than 50 employees. Only three women that were in charge of asset allocation decisions at their company responded to the survey compared to 39 men. The median age of the respondent was 47.5 years old.

Current Exposure

Over a third of the surveyed asset managers have invested in digital assets, while about 64% of respondents have not invested yet. Among the institutional investors who have had exposure to digital assets, approximately 69% of respondents have 10% or less of their assets under management in crypto assets. Notably, over a third of those surveyed have only 1% or less of their assets under management in crypto assets.

Question: Has your company invested in crypto assets in the past?

Source: Cointelegraph Research

This survey was conducted during the 2020 shutdown of the economy due to the government’s response to the Corona virus. During mid-March, many investors de-risked their portfolios and went into cash. From peak (February 19, 2020) to trough (March 17, 2020) Bitcoin lost 50% of its value, and briefly trading in the high 4000s. Since then, the price has recovered 115% to above $10,000. Bitcoin has performed better than equities, fixed income, real estate, and gold year to date (as of October 8, 2020). If governments continue to stimulate the economy with newly created money, then this trajectory is expected to continue. If the fiat faucet is ever turned off, there will likely be an ensuing correction in all asset classes.

Question: What percentage of your company’s assets under management are invested in crypto assets?

Source: Cointelegraph Research

This article is an extract from the 70+ page Discovering Institutional Demand for Digital Assets research report co-published by the Crypto Research Report and Cointelegraph Consulting, written by eight authors and supported by SIX Digital Exchange, BlockFi, Bitmain, Blocksize Capital, and Nexo.

It is important to note that these figures apply to digital assets in general, but that there is a variety of these assets that are viewed by investors from different angles. Therefore, we will take a look next week at exactly how the interest is composed and what the conditions are for investors to make their purchases.

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