U.S. Regulators lately were constructive about crypto: Regulators across the world have realized that cryptocurrencies are not going anywhere. Still, there are many issues to negotiate: Identifying players who’ve been defrauding investors with phony initial coin offerings. Defining the differences in between utility tokens and security tokens, Working with crypto companies to create appropriate regulations to defend investors without hurting innovation. Overall, the industry and regulators are heading in the right direction, although it may take a few more years before they develop common standards. Cryptocurrencies provide a distinctive and an attractive combination of returns and volatility: Crypto’s assets are attractive because they enjoy fairly low correlation to other asset classes, such as bonds and gold.
Put simply, crypto assets can be a perfect way for investors to diversify a portfolio consisting of stocks and bonds. Research demonstrates that a 2 percent exposure to crypto assets in a portfolio can, on average, increase returns by up to 200 bps. Five percent exposure could boost performance by over 500bps, nearly double that of a typical stock\/bond blended portfolio. In the same time, active managers seeking retuns better than the market will possibly seek the high volatility of Bitcoin along with other digital currencies. Institutional solutions for quality custody could come to market soon: There’s an urgent need for qualified custodians to protect the growing number of crypto assets.
Very few crypto custodians meet the strict security requirements demanded by regulators and institutional investors. Coinbase, one of the more popular exchanges, has launched custody services by partnering with Electronic Transaction Clearing, a regulated broker dealer. ItBit and Xapo also have also started to offer comparable services and we expect more to follow. Cryptocurrency futures, derivatives, and forward contracts are gaining adoption: The volatility of crypto prices at the start of the year dramatically boosted demand for crypto derivative products. With derivatives, investors don’t need to keep the underlying crypto asset, but they can still enjoy the potential benefits while possibly reducing loses, much like they hedge regular currencies.
While many exchanges don’t yet allow direct sale of Bitcoin, investors can speculate on cryptocurrency pricing by trading futures on exchanges such as BitMEX, LedgerX and OKCoin. Institutional investors used futures contracts to influence crypto currency prices, especially BTC. At the US, move by Chicago Mercantile Exchange and Chicago Board of Exchange to provide futures trading has further validated the industry. Regulatory approval for a crypto Exchange-traded fund is more than likely imminent: There’s a clear need for an industry or market based exchange traded fund to help investors diversify risks. Several crypto companies, like Gemini and Bitwise, have filed for crypto ETFs, but so far, regulators haven’t approved any.
Nevertheless, the U.S. Securities and Exchange Commission could be shifting its position. They agency is now more worried on reducing fraud on platforms that propose ETFs as opposed to the ETFs themselves. We think the SEC may soon approve a cryptocurrency ETF.