Cryptocurrency market maturing as more investment products are approved

It is digital asset investment products such as these, launched in global financial centres such as the UK and the US, that will finally move the asset class into the mainstream of investing.

The crypto investment product market is still in its infancy. At the end of 2021, the digital asset investment product sector was worth $62.5bn, covering such products as crypto-ETFs or hedge funds. In comparison, the total crypto market capitalisation is $1.25trn. Even more impressive, at its peak in November last year it almost broke the $3trn mark. Clearly, it is under-penetrated by asset managers.

However, strong retail demand and the evolving regulatory landscape are set to see the crypto investment product market gain momentum. The Australian regulator only approved exchange-traded products investing in ‘physical’ cryptocurrency at the end of last year, joining Canada, Brazil, and a number of European countries. However, such spot-crypto ETFs have yet to gain approval in the two largest financial centres – the UK and the US.

Approval in these markets would significantly propel growth. Demand is there: the US’ first bitcoin futures ETF launched in October 2021, and it became one of the most heavily traded ETFs ever. Within the first few days, it attracted more than $1bn.

Similarly, in Australia, the ASX’s first crypto ETF – which launched last year and invests in up to 50 crypto companies, such as Coinbase – hit trading records on its first day of trading, reaching a trading volume of A$8m ($5.5m) in less than 15 minutes, though its first spot-crypto ETF released in May 2022 to only muted demand. Even so, it shifts the landscape of the crypto market more towards mainstream investors, addressing key concerns.

Chief among these was regulatory uncertainty; the risk of a ban such as China’s sweeping prohibition last year is all too real as the crypto market remains largely unregulated. This combined with security concerns represents a major deterrent for investors. According to Chain Analysis, cryptocurrency crime almost doubled in 2021, reaching $14bn. ETFs overcome this issue. The more regulated nature of share markets reassures investors, and ETFs offer an added layer of security by removing the need to worry about key encryption, custody, and managing wallets. This becomes a problem for the asset manager, which can afford institutional-level security, rather than individual investors.

As more licensed and regulator investment products join the crypto markets, these concerns will recede. Indeed, once the UK and the US join the party, growth is likely to be exponential as even mainstream investors seek exposure to this evolving asset.