The Investment Firm’s Dilemma: Crypto ETFs or Crypto-Asset Services?

Crypto ETFs or Crypto-Asset Services? Since the SEC approved 11 spot Bitcoin ETFs in January, there’s been intense focus on these new instruments. They’re being evaluated for their impact on the cryptocurrency sector and the benefits they may offer compared to investing directly in Bitcoin.

And it seems they certainly have an impact: In recent weeks as of writing this article, BlackRock’s new bitcoin ETF reached an impressive $10bn of asset under management only seven weeks after launching, while other ETFs also have reached considerable numbers. 

In Europe, the MiCA (Markets in Crypto Assets) regulation is now in effect, prompting many traditional financial organizations to consider how to offer crypto to their clients. Some are debating whether to create their own crypto trading services or simply list an ETF for client investment. 

Choosing between these two paths is like comparing apples and oranges. If local regulations allow, offering crypto asset services can be a more all-encompassing and future-oriented business move. Conversely, when such guidelines are not clear for crypto services, ETFs or other derivatives (if available) might be more suitable. 

Key aspects to understand the main differences between the two approaches include: 

1. Consider the purpose: Are you aiming to provide complex crypto services later or just want to give your clients a taste of crypto? For the latter, an ETF may be sufficient. 
2. Identify your clients: Who are your clients, target segments? What are their priorities in terms of investing, trading, portfolio management etc.? ETFs may fit more easily to traditional processes while crypto services can provide a deeper experience. 
3. Assess the range of offerings: With well-established crypto services it is easier to extend the offering (e.g. add new crypto assets or new types of crypto assets, or extending into other services like crypto based credit etc.). In case of ETFs, you may need to wait for a new ETF for each crypto asset. 
4. Plan for integration: Setting up crypto services is a more involved process. You’ll need various partnerships, establish new procedures, and incorporate services. 
5. Evaluate long-term benefits: Your team will gain valuable knowledge and be more engaged with the industry, making it easier and less costly to adopt innovative solutions built on this technology later. 
6. Understand the risks: Each approach presents different risk factors including regulatory, market, operational, counterparty, liquidity, and reputational risks. Institutions must decide which aligns better with their risk management strategies. 

While each company may face unique challenges, it’s clear that setting up cryptocurrency services is a more involved process that can potentially offer greater long-term benefits. 

Each day, we lead our clients through such genuine business questions with a passion that goes beyond the word “work”. If you need assistance or have questions about blockchain and digital assets, don’t hesitate to reach out.

Data source (actual): https://etfdb.com/themes/physical-bitcoin-etfs/

Authors: Péter Kanti, Botond Bátorfi