Matthew Clapp is the head of business development and asset management at EQONEX a Nasdaq-listed digital assets financial services company
The wave of bearish volatility dragging down the digital asset markets over recent months is not new for long-time observers. However, there is a distinctly different sentiment towards cryptocurrencies in 2022 compared to previous bear markets in 2018 and 2015. Back then, traditional investors had not yet begun to see crypto as an investable asset and tended to perceive the dramatic falls in price more as a death knell for Bitcoin than as an inevitable downside to the periods of extreme bullishness that preceded them.
This time, investors across the Middle East from traditional finance seem to be far less cautious in their attitude to digital assets – even though the current bear market was ushered in by a series of high-profile collapses, such as Terra’s UST and LUNA tokens and lending firm Celsius. Nevertheless, the market seems undeterred, and demand for cryptocurrency products among investors such as high net-worth (HNW) individuals and family offices remains high. In June, Capgemini published its 2022 World Wealth Report, which found that among 2,973 HNW individuals, 71 per cent had invested in digital assets, rising to over 90 per cent among those aged under 40. Plus the Middle East and North Africa (Mena) region was the fastest-growing market for crypto adoption during the last year, according to Chainalysis, signalling a strong appetite from investors for the asset class.
It is evident that the entry of wealthy millennials and Gen Z participants to the market is playing a part, but the overall bleakness of the macroeconomic outlook could also be a contributing factor to the ongoing appetite for cryptocurrencies. Whatever the reasons, some financial institutions have been more reticent than others when it comes to meeting demand.
JPMorgan Chase chief Jamie Dimon, for instance, is famously anti-crypto, having recently doubled down on his scepticism during a congressional testimony to US lawmakers. However, during a previous outburst, even he acknowledged that many of his clients took an opposing view and that his bank would ultimately need to meet demand.
Tapping traditional financial products
Given the ongoing regulatory fog around cryptocurrency in many major jurisdictions like the United States, institutions and cryptocurrency operators offering digital asset services to investors find they must tread carefully to avoid excessive compliance and operational risks. Not only is there the fact that any offering must not fall foul of existing laws governing financial markets, but also that some services, such as custody provision, involve substantial investment in digital infrastructure.
As such, many providers are seeking ways to offer their clients indirect exposure to digital assets through vehicles such as exchange-traded products or derivatives. The Nasdaq Dubai listed its first regulated listed digital asset-based fund last year. Using these traditional structures gives investors greater flexibility when it comes to managing both risk and volatility. Regulators have shown themselves willing to approve exchange-traded products such as EQONEX’s physically-backed Bitcoin ETN, meaning they can be traded safely on regulated, globally recognised exchanges.
As such, these products are also more quickly liquidated than physically-held Bitcoin in times of extreme volatility. Although a Bitcoin trade is very fast, the need to hold assets in secure cold storage often means they are not instantly accessible. Furthermore, without all the overheads associated with digital asset custody, exchange-traded products, structured products, and other indirect exposure vehicles can offer the potential for greater returns to investors, in turn making them more attractive to banks and other issuers.
Nascent market with burgeoning competition
The high demand and relatively low barriers to market for issuers willing to play ball with the regulators mean that there is now a rapidly-growing market for crypto-based exchange-traded products and other innovative investment vehicles. The FT recently highlighted a swathe of new digital asset launches in Asia, underscoring previous reports that the region was proving particularly impervious to the downturn in cryptocurrencies.
However, similar growth patterns have played out across virtually all areas of the cryptocurrency sector over recent years, including exchanges, institutional services, DeFi protocols, and other segments. Based on the success of a few early entrants, many players rush into the market, and it quickly becomes crowded with operators offering carbon copy variations of the same product. But invariably, only a small handful of standout operators rise head and shoulders above the rest.
At this relatively early stage, it is hard to predict which of the current ETPs or issuers will become the darling of the lucrative market for HNW individuals and family offices in the Middle East. However, given the priorities and preferences of this group, it seems most likely that it will be those crypto players who can demonstrate their commitment to regulations, with strong teams and superior products that will ultimately break through to long-term success.
Even despite the rapidly increasing pace of adoption, it is still very early in the cryptocurrency journey for HNW individuals and family offers as an investor class. They may view crypto as a more investable asset than several years ago, but nevertheless, digital assets are still a relatively small proportion of most investors’ portfolios. As such, firms leveraging traditional financial wrappers and exchange-traded products to maximum effect are primed to support further adoption of cryptocurrencies by this wealthy and highly influential group in the world’s fastest growing region for crypto investing.