While retail investors have been active in trading the cryptocurrency market since early 2000, it was not until the run-up in 2017, that digital coins attracted the attention of the institutional markets. While the enthusiasm associated with these markets declined as the products tumbled in value in 2017, new ways to generate risk have immerged providing some security and safety related to the products.
Not only have futures and CFDs come to the forefront but investable trust assets from companies such as Grayscale have allowed investors to take advantage of the underlying movements of cryptocurrencies. These products provide an indirect investment into cryptocurrencies which have several benefits. The creation of new products has been driven by demand. In 2019, Fidelity Investments conducted a survey that showed that 72% of the respondents prefer investing in cryptocurrencies through investment products as opposed to direct investment.
The Futures Market
In 2017, the Chicago Mercantile Exchange introduced its CME futures on Bitcoin. A futures contract is the obligation to purchase an asset at some point in the future. Some futures contracts are physically delivered products while others are financial products that have no physical delivery. These products allow both retail and institutional investors an opportunity to purchase or sell a futures contract that tracks the underlying movement of Bitcoin. The two-way flow of crypto trading these assets allowed investors the ability to short the bitcoin market which might have led to the decline in the price.
The benefit of using these products is that you do not have to worry about someone stealing your bitcoin by hacking into your account. You do not need to set up an account with a physical bitcoin address. Additionally, futures contracts provide leverage through a margin account. This is an account that increases the notional value of the products you are trading through borrowed capital. When you open a margin account your broker will ask some questions related to your trading experience and knowledge, before approving your account.
Digital Trust Funds
In 2019 Grayscale released its digital trust fund which mirrors the movements of some of the larger cryptocurrencies such as bitcoin, ether, and ripple. Grayscale says they are the largest digital investment management company with approximately $2.1B of assets under management. The products that are listed as investment trusts have an investment objective that reflects the price performance of digital assets. The model that is used by Grayscale is like the commodity ETFs, which helps investors seeking exposure to digital assets through a traditional investment vehicle.
Contracts for Differences
These are over the counter products that track the underlying movements of cryptocurrencies. As futures contracts, CFDs offer leverage that allows an investor to use a margin account. You do not need to have multiple cryptocurrency accounts. You can generally use the CFD account that you use for forex and commodities to trade cryptocurrencies.
What are the Benefits of Futures and Trusts?
Both futures and trust assets offer the benefits of investing in digital assets without having to purchase, transfer, and store digital assets themselves. An investor does not have to manage additional individual accounts, wallets, and private keys. Institutional investors do not have to worry about theft. The Products were developed to offer investors ease of mind.
The Bottom Line
The key takeaway is that investors have choices. For those who are interested in trading cryptocurrencies through an investment vehicle, there are alternatives. By either using futures contracts, CFDs, or investment trust vehicles investors can avoid physical-digital accounts that provide an extra layer of security.