Cadenza Chronicle

Exchange Traded Funds (ETFs) have been a market staple for over 30 years.

Retail investors have adopted and embraced the product and with digital asset and blockchain ETFs now proliferating, could these innovations be next to go mainstream?

The Intersection of Blockchain and ETFs

Called “One of the most important financial innovations of modern time” exchange traded funds are the natural successor of index funds.

Designed as a way to offer investors the best of both a mutual fund and a stock, the first ETF was listed in 1990.

However, contrary to popular belief, ETFs are a decidedly Canadian invention. The first US-listed ETF wasn’t launched until 1993 with the introduction of the SPDR S&P 500 Trust.

Like with all good things, it took some time for ETFs to be adopted.

But now, with more than $11.5 trillion in global assets across nearly 10,000 products, ETFs are one of the most popular investing products in the world.

Blockchain technology has had a similar ascent into the limelight.

The concept of a digital ledger with growing lists of records (blocks) that are securely linked together via cryptographic hashes like a chain first appeared in a paper titled How to Time-Stamp a Digital Document in 1991.

This early work inspired others, like computer scientist Nick Szabo to create a working proof of concept by launching the earliest version of a decentralized currency – Bit Gold in 1998.

Much like ETFs, decentralized digital currencies and by extension the blockchain wouldn’t begin gaining traction until more than a decade later when Bitcoin was created by whoever or whatever Satoshi Nakamoto is in 2008.

Today, digital assets are a $2.7 trillion market and the blockchain is widely recognized as the safest record-keeping system in the world.

These two similar, yet immensely different things are now intersecting for the first time ever and the impact could be monumental.

Introducing Blockchain ETFs

Before January 2024, the percentage of the population owning digital assets stood at around 4%.

A far cry from institutional investors, who according to Fidelity’s recent Institutional Investor Digital Asset Survey, a full 34% reported having at least some exposure to digital assets.

Both figures have been steadily growing over the past five years, but some significant barriers to adoption still remain in place, especially on the retail side.

Chief among these is how digital assets are typically bought and sold.

For example, in order to buy Bitcoin (BTC), you will need to find and register with a reputable digital asset exchange, as BTC, with few exceptions, cannot be purchased through your regular investment brokerage account.

Next, you will need to fund your account via your preferred payment method like a credit or debit card, PayPal, etc.

Finally, you will want a safe, off-exchange place to store your newly purchased coins, so you will need to get a digital wallet.

For many, this process, among other factors, is what has kept them from taking the plunge and becoming digital asset owners.

Its a big reason why 20-25% of the global population owns stocks, compared to only 4% who own digital assets.

ETFs are about to change this.

The Blockchain Goes Mainstream

January 10th, 2024.

This date will forever be remembered as the day the first spot Bitcoin ETF was approved by the SEC and it will also go down in history as the beginning of digital assets and the blockchain crossing over from digital, alternative assets into common portfolio holdings of everyday investors.

According to the latest data from Cadenza venture partner Jonathan Bier and his unique digital asset equity investment firm, Farside Investors, capital inflows into Bitcoin ETFs recently crossed the $20 billion mark.

These aren’t just hedge funds and alternative investment managers either, they are some of the largest 401 (k), pension fund, and mutual fund managers in the world, such as JPMorgan, Wells Fargo, UBS, BNP Paribas, and Royal Bank of Canada, among others.

However, this is just the start.

At the end of April, a batch of six Bitcoin and Ethereum ETFs debuted on the Stock Exchange of Hong Kong, marking the first time retail investors in Asia could effortlessly purchase digital assets at spot prices.

Bloomberg Intelligence analysts expect these new ETFs to see about $1 billion of net inflows over the next two years, representing 2% of Hong Kong’s $50 billion ETF market.

Not to be outdone, digital asset investment trusts have already existed on U.S. markets.

For example, Grayscale Investments, which is the proprietor of a Solana Trust, just announced the creation of an Avalanche (AVAX) investment trust, giving accredited investors (for the time being) the opportunity to broaden their exposure to the digital asset ecosystem.

The first spot Ethereum ETFs also recently began trading in the U.S. with some already surpassing $1 billion in net inflows and Solana ETF applications also currently being reviewed for listing by the SEC.

The sponsor of one of the original Ethereum ETFs is global investment manager and Cadenza partner, VanEck.

Daring to be Different

VanEck CEO, Jan van Eck’s motto of “not settling for the conventional” and “daring to be different” go hand-in-hand with offering investors direct access to digital assets and the blockchain economy.

Since its founding by Jan’s father John van Eck in 1955, VanEck has had a history of being different.

For example, it was one of the first U.S. asset managers to offer investors access to a gold fund in the late 60s and then emerging markets in the first half of the 90s.

It was also among the very first issuers of an Exchange Traded Fund (ETF) in 2006, which has grown into a $110 billion business for the asset manager that includes the largest gold miners ETF in the world, the VanEck Gold Miners (NYSE: GDX).

Now, VanEck is keeping its tradition of not settling for the conventional alive.

In 2021, the VanEck Crypto and Blockchain Innovators ETF was launched, offering a diversified way to invest in blockchain economy businesses and this past January, the New York-based firm was finally able to list its Bitcoin Trust ETF under the apt ticker ‘HODL’.

These products now make up 0.5% of the business’ total assets under management, which will only continue to grow with the recent approval of its spot Ethereum ETF, which is likely to begin trading later this year.

The likes of BlackRock, Charles Schwab, Invesco, Fidelity, and Franklin Templeton have also followed suit, launching or about to launch their own digital asset and blockchain ETF products.

This accomplishes a few significant things:

First, ETFs are already mainstream, with more than 16 million U.S. households owning them.

Their impact on markets cannot be understated and the familiarity retail investors already have with them will help digital assets and the blockchain gain the same level of acceptance.

Second, ETF fees average less than 1% all in. Easy and transparent.

In contrast, most digital asset exchanges charge between 0.5% to 1.5% per trade, not to mention other transaction fees, potential onboarding costs, and so forth.

Since rolling out a new ETF costs a significant amount and takes anywhere between six months to two years on average, firms wouldn’t be spending their time or money if they didn’t see two things:

• An opportunity for market-beating returns over the short term.
• A transformative shift happening in the market over the long term.

They’re right.

The largest institutions, from banks to hedge funds and traditional asset managers have come to the startling, but empowering realization that the blockchain will not only impact their respective businesses, but that it could fundamentally change them altogether, along with countless other sectors and industries as well.

They are investing accordingly to the tune of billions of dollars.

If the old maxim that individual retail investors are always late to the party holds true this time around, then the biggest fireworks and gains in digital assets and blockchain are still to come.

If you found this article insightful, you may also like The Tokenization of Real World Assets or The Cloud And AI Combo – Groundbreaking or Conflicting?

If you would like more information on our thesis surrounding digital assets and the blockchain or other transformative technologies, please email info@cadenza.vc