As Bitcoin transitions from a niche interest to a mainstream financial asset, various investment avenues have emerged beyond direct purchase. This article explores the expanding landscape of Bitcoin ownership, including ETFs, ETPs, and Trusts, reflecting its growing acceptance. According to the 2023 Global Crypto Hedge Fund Report by PwC, CoinShares, and AIMA, spot trading in crypto-assets has surged, with 69% of hedge funds participating, up from 43% the previous year. The report also highlights a decline in derivative investments due to counterparty risks. This article examines these trends and the performance of digital asset funds, offering insights into the evolving strategies of crypto hedge funds.

From a niche for blockchain enthusiasts, Bitcoin continues to grow and gain acceptance as a mainstream financial instrument. As the adoption has risen, different ways are arising to own the asset other than the traditional way of buying the asset directly such as ETFs, ETPs, Trusts, etc. 

According to the 5th Annual Global Crypto Hedge Fund Report (2023) by PwC, CoinShares, and AIMA, over two-thirds (69%) of all participants in the survey are engaging in crypto-asset investments through spot trading, a notable increase from 43% in the previous year’s report. The survey was conducted in Q1 2023 across a sample of 131 crypto-native hedge funds.

In contrast with directly investing in the spot market of cryptocurrencies, several alternatives exist such as derivatives, venture capital, and structured products. According to the PwC report, the proportion of respondents investing in crypto-assets via derivatives declined to 38% in 2023, down from 52% in 2022, possibly due to a heightened awareness of risks associated with counterparties such as Genesis and FTX.

91% of Digital Asset Funds are Invested in Bitcoin

Source: PwC, CoinShares, AIMA

The majority of crypto hedge funds performed significantly better than the price of BTC during 2022. While Bitcoin’ performed -64% from 31 December 2021 to 31 December 2022, most strategies handled the bear market better than the benchmark (with the exception of fund of funds). 

Digital Asset Fund Performance by Strategy 2022

Source: PwC, CoinShares, AIMA

Regarding investment strategies, 31% of respondents in 2023, up from 2022’s 10%, are taking a passive approach. The complexity of the technology in this sector can be challenging for those not deeply immersed in it. Consequently, a growing number of fund managers seem to be opting for passive strategies to access this market despite passive strategies returning a loss of 37% on average in 2022.

In the realm of hedge funds, 23% report utilizing actively managed funds or funds of funds for their crypto-asset investments. Additionally, 15% indicate their involvement through venture capital investments in this sector.

For investors that want exposure to Bitcoin without handling their own private keys, there are several alternatives such as passive funds, active funds, mining stocks, and venture capital. This section dives into some of the household names in the Bitcoin ecosystem. 

Assets Under Management of Largest Bitcoin Passive Products

The evolving landscape of Bitcoin investment reflects its growing stature in the financial world. This article has delved into various investment options, from direct purchases to sophisticated financial products like ETFs, ETPs, and Trusts. The insights from the 2023 Global Crypto Hedge Fund Report reveal a noticeable shift towards spot trading among hedge funds, indicating a preference for simplicity amid complex market conditions. Conversely, the decline in derivative investments underscores heightened risk awareness. As fund managers adapt, exploring passive and active strategies, the crypto investment domain continues to reshape, promising diverse opportunities and challenges for investors keen on leveraging Bitcoin’s potential.

In the ever-evolving landscape of cryptocurrency, securing digital assets is paramount. This article explores three key methods of Bitcoin storage that balance security and accessibility: multi-signature wallets, hardware wallets, and air-gapped cold storage.

Multi-signature wallets, offered by providers like Ledger Institutional, Casa, and Unchained Capital, require multiple private keys for transaction authorization, enhancing security. Hardware wallets, such as Trezor and Ledger, provide offline storage for private keys, safeguarding them from online threats.

Additionally, air-gapped cold storage, exemplified by the Glacier Protocol, offers the highest level of security by keeping Bitcoin reserves offline, though it may limit immediate trading capabilities.

1. Multi-signature Wallets: Requires multiple private keys to authorize a Bitcoin transaction. Provides a balance between security and accessibility. Notable multi-signature wallet providers include:

Figure 42: Multi-signature Wallets

Source: Cointelegraph Research, CryptoResearch.Report

2. Hardware Wallets: Physical devices such as Trezor or Ledger that securely store private keys offline.

3. Air-gapped (Cold) Storage: Keeping a reserve of Bitcoin offline. Provides the most security but lacks immediacy for trading. The gold standard for cold storage that is self-custodied is the Glacier Protocol. Available at glacierprotocol.org, the Glacier Protocol is a 78-page PDF that gives step-by-step instructions for how to self-store large amounts of Bitcoin. 

As cryptocurrency continues to grow, selecting the right storage solution is crucial for safeguarding digital wealth. Multi-signature wallets offer a balanced approach to security and usability, making them ideal for institutional and individual users alike. Hardware wallets provide a secure offline option for those wary of online vulnerabilities.

For those prioritizing maximum security over convenience, air-gapped cold storage like the Glacier Protocol proves indispensable. By understanding and leveraging these storage methods, users can protect their Bitcoin holdings against an array of digital threats, ensuring their investments remain secure in the dynamic crypto environment.

In the dynamic world of cryptocurrency, the roles of fiat and Bitcoin custodians are pivotal in bridging traditional finance with digital assets. While fiat custodians are typically licensed banks, Bitcoin custodians often operate outside this framework, with exceptions like AMINA, which serves as both. This article explores the landscape of top custodians, highlighting their inception, domicile, and unique offerings.

It also delves into the insurance policies provided by traditional insurers like Aon and Lloyd’s of London, which have ventured into the crypto space. Additionally, the article examines the growing trend of self-custody, driven by security concerns and the collapse of centralized service providers.

Fiat custodians typically hold traditional currencies and may offer services for converting fiat to crypto and vice versa. The main difference between Bitcoin custodians and fiat custodians is that fiat custodians are licensed banks, whereas most Bitcoin custodians are not licensed banks. A notable exception to this is AMINA, which is both a Bitcoin custodian and a licensed bank. 

Top Bitcoin Fiat Custodians for Institutional Investors

Banks that Work with Bitcoin and Bitcoin Businesses 

Typically, major custodians (like Coinbase Custody, Fidelity Digital Assets, and BitGo) offer some form of insurance coverage for their clients’ Bitcoin holdings. For example, BitGo maintains a $250M insurance policy on digital assets whereas BitGo Trust Company maintains all of the keys. Specifically, the policy covers copying and theft of private keys, insider theft or dishonest acts by BitGo employees or executives, and a loss of keys. Traditional insurers such as Aon and Lloyd’s of London have ventured into the crypto space, providing policies for crypto custodians and other businesses. 

Since 2020, a noticeable downward trend can be seen in the exchange balance of Bitcoin, indicating that Bitcoin owners remove their Bitcoin from the exchange after making a purchase instead of leaving their Bitcoin in the exchange. The amount of Bitcoin on exchanges is currently at a 5-year low. 

BTC Flows Off Exchanges Suggest Self-custody Trend

Besides black-hat hacking, 2022 was also riddled with collapses and bankruptcies of centralized service providers, including Celsius and FTX. These events highlighted that funds are not safe unless they are in self-custody. In response, more and more users are purchasing hardware wallets. After FTX went down, wallet manufacturer Trezor posted a 300% growth in revenue figures and sold more devices than at the height of the bull market. This trend is set to continue and market researchers project that the market for hardware wallets will grow from $285M to over $1.4B by 2030.

The convergence of traditional finance and digital assets is reshaping the custodial landscape. As explored, both fiat and Bitcoin custodians play critical roles in ensuring the secure transition and storage of digital currencies. With institutions like BNY Mellon and JP Morgan Chase showing interest in crypto, and insurers expanding into crypto coverage, the integration of these two worlds is set to deepen.

However, recent trends indicate a shift towards self-custody, spurred by financial uncertainties and the rise of hardware wallets. As the market evolves, the focus on robust security measures and diversified custody solutions will be paramount for safeguarding assets in this ever-changing environment.

In the realm of cryptocurrency investment, a distinct preference for Bitcoin-centric companies has emerged among a segment of investors driven by various factors, including philosophical beliefs and concerns over anonymity. Companies like Relai cater to such investors by offering Bitcoin transactions without the need for Know Your Customer (KYC) procedures for purchases up to a certain limit daily.

This inclination towards Bitcoin-only platforms also stems from regulatory considerations, as other digital currencies risk being classified as securities by authoritative bodies like the SEC. Notably, recent legal developments have stirred the crypto community, especially following the SEC’s case concerning XRP. This article provides an overview of several Bitcoin-only exchanges and services that prioritize privacy, security, and adherence to the core values of Bitcoin maximalism, alongside insights into unique investment avenues like purchasing directly from miners.

Some investors want to work exclusively with companies that only handle Bitcoin transactions. This is often due to philosophical reasons, such as “Bitcoin Maximalism.” However, this preference may also stem from a desire to stay completely anonymous. The Bitcoin-only company Relai allows individuals to buy up to $1,000 per day without doing any KYC.

Another reason that investors may prefer Bitcoin-only companies is risk-reduction. Other digital assets are considered securities by the Securities Exchange Commission in the U.S. Since alternative digital assets “alt-coins” may be securities, the exchanges that sell them are violating the Securities Act for selling unregistered securities.

It is important to note that the SEC lost its case against the alt-coin XRP in 2023. In July, the United States Southern District Court of New York found that XRP (and thus cryptocurrency) was not a security when sold to the public on an exchange.

“In November 2023, we sold around 800 BTC with a trading volume of around 25 million EUR. We are currently selling around 25 BTC per day, with around 1m EUR trading volume per day on average.” Julian Liniger, CEO of Relai

An alternative to buying Bitcoin from an exchange, OTC desk, or broker is to buy directly from the miners that secure the Bitcoin network. Bitcoin miners can sell “clean” Bitcoin to investors who want to own Bitcoin with no transaction history. The demand for clean Bitcoin may increase if regulators continue to blacklist certain wallet addresses and mixing technologies. 

The landscape of cryptocurrency investing is increasingly accommodating investors who prefer to deal exclusively with Bitcoin, underpinned by a blend of philosophical, privacy, and regulatory considerations. Platforms like Relai and River have positioned themselves as leaders in this niche, offering services tailored to the needs of Bitcoin maximalists and those seeking to mitigate regulatory risks associated with altcoins.

Despite the challenges posed by the evolving regulatory environment, as evidenced by the notable case against XRP, these Bitcoin-only entities provide a secure and compliant avenue for investors. Furthermore, the option to purchase “clean” Bitcoin directly from miners presents an intriguing opportunity for investors looking to bypass traditional exchanges altogether, highlighting the diverse strategies within the Bitcoin ecosystem designed to meet the demands of a broad investor base.

Understanding the true cost of trading Bitcoin in a fragmented and often opportunistic market can be complex. This article explores why prices vary significantly across different cryptocurrency marketplaces, including centralized exchanges (CEXs), liquidity providers (LPs), and decentralized exchanges (DEXs). It addresses the lack of an official consolidated best bid and offer (BBO) for crypto assets and how some market participants prioritize profit over best execution.

What Is the cost to trade Bitcoin & other crypto assets? The question sounds simple, but alas, it is not, with the vast majority of current markets ignoring other participants & trading at prices which are often higher or lower than other markets display.   There are several reasons for this phenomenon:

• A perceived lack of data — there is no “official” consolidated best bid and offer (BBO) for crypto assets.
• Market Fragmentation — there are many marketplaces including centralized exchanges (CEXs), liquidity providers (LPs) and decentralized exchanges (DEXs) with conflicting price oracles.
• Opportunism — many market agents ignore “best execution” responsibilities to their clients in favor of maximizing profits from payment for order flow (PFOF) arrangements and keeping their costs down.

Our goal at CoinRoutes, in addition to helping investors navigate this market to achieve best execution, is to provide data to help investors & trading firms understand the market.  We can provide context, despite the fragmentation, for understanding the cost of trading in terms that traditional institutional traders will be comfortable with.  To that end, we have developed a consistent metric we call the CoinRoutes Liquidity Index.  To understand why we constructed the index, however, it is useful to look at some raw data that shows trading costs across the major centralized crypto exchanges. 

This chart shows the cost to buy and sell $25,000, $100,000, $250,000, $500,000 and $1,000,000 of Bitcoin in US Dollars from February through November of 2023:

As can be seen in this chart, there is a small persistent negative cost for $25,000 orders that became very large during some of the periods earlier this year.  The persistent negative cost results from price discrepancies across exchanges where the bid on one exchange is often higher than the offer.  Traditional financial markets would call these “crossed markets” which are very rare in most asset classes, but almost always exist in digital assets.  It is worth noting, however, that most of the time, those differences are lower than the costs to move assets between exchanges and arbitrage away the difference.  There are, however, often meaningful differences during periods of high volatility.  Such price discrepancies can create a distorted view of the potential cost to trade.   As a result, we created the CoinRoutes liquidity index to normalize the data and provide traders with a consistent and fair benchmark for understanding the cost of liquidity. 

To calculate the CoinRoutes Liquidity Index, we measured the cost differential between $25k orders and $1 million orders based on optimal “smart routing” for buying and selling at each size.  This is calculated by “walking the book”, as CoinRoutes holds the full order book of all major exchanges in memory.  The calculation uses that order book to add up the cost for selling at all bids, ranked in order of highest to lowest to achieve a $1 million sale and the cost of buying from all offers, ranked from the lowest to the highest to achieve a $1 million buy.   We then calculated time weighted averages from 5 second samples every day.   It is important to note that this benchmark assumes optimal order routing, meaning it assumes all exchanges were available for trading at all times, with sufficient inventory of dollars, stablecoins or tokens.  As a practical matter, this requires access to sophisticated routing technology and superior treasury management.  As a result, this is a difficult benchmark for most institutions to replicate without spending on infrastructure or paying a vendor.  It is, however, an accurate and fair method to measure the cost of liquidity, before markups or fees that most liquidity providers may charge.

CoinRoutes Liquidity Index Results:

CoinRoutes calculated the index from February through the end of November of 2023 for Bitcoin & Ether denominated in US Dollars, in USDT (Tether) and for Perpetual Swaps for both also denominated in US Dollars and USDT.   There are several important conclusions:

1) Costs for trading Bitcoin and Ethereum in institutional size are quite competitive with global equities of similar market capitalizations, if the institution is able to access all markets.  (Retail investors in Bitcoin and Ethereum pay much more, which is quite different than equity markets where such traders pay extremely small spreads, often with no fees) 

2) USDollar spot transactions are more expensive than USDT (Tether) spot trades.  While this trend has moderated somewhat over the year, it is still statistically significant.

For Bitcoin, over the last quarter, the dollar cost for $1 million in liquidity averaged between 5 and 7.5 basis points, while the USDT cost for $1 million in liquidity averaged between 3.5 and 5.5 basis points with some more volatility.

For Ethereum, over the last quarter, the dollar cost for $1 million in liquidity averaged between 5 and 9 basis points, while the USDT cost for $1 million in liquidity averaged between 4 and 8 basis points.

3) There is more liquidity & lower cost to transact in perpetual swaps than in spot.  This is unsurprising, as reported volumes on the swaps market are significantly larger than spot, but the order book data backs this up.  This also explains why OTC trading is so popular in the spot market, as the market makers are able to hedge in the perpetual swaps market to create tight spreads.

For Bitcoin, the perpetual swap cost for $1 million in liquidity averaged between 3.5 and 7 basis points for the USD denominated swaps and between 1 and 2.5 basis points for the USDT denominated swaps.

For Ethereum, the perpetual swap cost for $1 million in liquidity averaged between 4 and 8 basis points for the USD denominated swaps and between 2 and 3.5 basis points for the USDT denominated swaps.

This first chart show the liquidity cost to buy or sell $1million of Bitcoin in US dollars across the major crypto exchanges.  Note that during the spring and again in the early summer there were spikes, predominantly on weekends when banking issues made moving money across exchanges difficult, but the average has settled into a range between 5 and 7.5 basis points.   As this measures the cost for each, it implies an average bid / offer spread of between 10 and 15 basis points for US dollar based liquidity, which is similar to what anecdotal evidence suggests is an average spread for institutional size. 

In conclusion, navigating the fragmented cryptocurrency market to achieve best execution is fraught with challenges, from varying prices across exchanges to opportunistic behaviors by market participants. This article has highlighted the complexities and the persistent price discrepancies that can distort the perceived cost of trading.

The CoinRoutes Liquidity Index emerges as a crucial tool, offering a standardized benchmark that helps traders understand the real cost of liquidity. While achieving optimal order routing and superior treasury management may be difficult without significant investment, the index provides a fair and accurate method to measure trading costs, paving the way for more informed and effective trading strategies in the digital asset space.