Banks' Crypto Investment Strategies: Exploring The Landscape

Crypto is a rapidly growing asset class that is gaining traction among retail and institutional investors. Despite the volatile nature of cryptocurrencies, many leading banks have been entering the digital asset and DeFi markets. In August 2021, 55% of the top 100 banks invested in blockchain and/or digital currency spaces, and as of May 2022, 61 banks have invested in this space at least once. The most active investors in blockchain companies include KB Financial Group, United Overseas Bank, Citigroup, Goldman Sachs, and the Commonwealth Bank of Australia. The big financial institutions are adopting crypto and blockchain, with companies like BlackRock, Fidelity, and Goldman Sachs making moves in the industry. The appeal of crypto to banks lies in the potential to create new revenue streams, increase market share, and attract younger customers.

Banks are entering the digital asset and DeFi markets

Despite the volatility of cryptocurrencies, many leading banks have been entering the digital asset and DeFi markets. This is due to a combination of consumer demand and the potential for new revenue streams.

A survey by Coinbase shows that 20% of American adults currently own crypto, despite the negative press and exchange failures. Crypto is the most popular investment tool among 18-34-year-olds in the US, and 20% of those want to be able to own crypto in their retirement accounts. This demand is driving banks to enter the market.

Digital assets, including cryptocurrencies, stablecoins, central bank digital currency (CBDC), non-fungible tokens (NFTs), and decentralised finance (DeFi) tokens, can help banks create new revenue streams and increase market share by providing access to cryptocurrency without geographic limitations. Banks with digital asset offerings can benefit from greater transaction speed and certainty, automation through smart contracts, enhanced security, and operational efficiencies.

Some banks are launching crypto-related services and new digital assets, while others are investing in crypto start-ups. For example, Mastercard, Visa, and American Express have partnered with digital asset companies, allowing banks and merchants in their network to offer crypto-related services and crypto reward cards. Large banks like JPMorgan Chase, Goldman Sachs, and Bank of America have launched crypto trading desks, and wealth management firms, such as Morgan Stanley and Wells Fargo, provide access to crypto through their products and funds.

Crypto ETFs and Mutual Funds

Crypto ETFs trade on regular stock exchanges, and investors can hold them in standard brokerage accounts. They have higher fees than other ETFs, and while the funds themselves are regulated, there is no oversight in the crypto markets where the funds are invested. The SEC has argued that without proper oversight and surveillance-sharing agreements with regulated markets, it is difficult to prevent fraudulent activities and ensure fair trading practices in the crypto markets.

The first cryptocurrency ETF, the ProShares Bitcoin Strategy ETF, started trading in October 2021. This ETF tracks bitcoin futures prices. The SEC approved the first 11 spot cryptocurrency ETFs for the US market in January 2024. These funds allow retail traders to gain direct exposure to crypto prices without owning the assets directly.

Fidelity, for example, has two crypto funds—one for bitcoin, and one for ether—allowing investors to add exposure to crypto in brokerage, trust, and IRA accounts. These are spot crypto ETPs, which are for investors with a high-risk tolerance and invest in a single cryptocurrency.

Crypto stocks

While crypto stocks are not stocks in the traditional sense, they are a rapidly growing asset class that is gaining traction among retail and institutional investors. Crypto stocks include semiconductor, brokerage, and payment stocks. Some of the most trending crypto stocks include Advanced Micro Devices (AMD), Coinbase Global (COIN), and Nvidia (NVDA). Other notable mentions are Paypal Holdings (PYPL), Block (SQ), and Visa (V).

It is worth noting that crypto stocks are still subject to market risks and can be influenced by the performance of the broader cryptocurrency market. However, they offer a more regulated and secure option for investors interested in the digital asset space.

Leading banks and financial institutions have also been cautiously entering the crypto space. For example, large banks like JPMorgan Chase, Goldman Sachs, and Bank of America have launched crypto trading desks. Wealth management firms such as Morgan Stanley and Wells Fargo provide their clients with access to crypto through their products and funds.

Crypto and blockchain network

Crypto and blockchain technology is becoming increasingly popular, with a growing number of people adopting its use. Despite its volatility, cryptocurrency is growing in popularity and usage across North America, with Bitcoin and Ethereum being the most preferred among users. A recent survey by Coinbase shows that 20% of American adults currently own crypto, and 13% of Canadians currently own crypto assets or crypto funds. This indicates that crypto is here to stay and signals a call to action for regulators to protect investors' financial futures with regulatory clarity and guidance.

The crypto market has experienced considerable volatility since 2021, with the global cryptocurrency market cap dropping from its peak of $3 trillion in November 2021 to nearly $800 billion in November 2022. Despite this volatility, many leading banks have been cautiously entering the digital asset and DeFi markets. Large banks like JPMorgan Chase, Goldman Sachs, and Bank of America have launched crypto trading desks, and wealth management firms, such as Morgan Stanley and Wells Fargo, provide access to crypto through their products and funds.

In August 2021, 55% of the top 100 banks (by assets under management) invested in companies operating in the blockchain and/or digital currency spaces, either directly or through subsidiaries. As of May 2022, a total of 61 banks have invested at least once in this space, indicating a stable outlook and expected to drive more investment participation from banks in the near future. The most active investors based on the number of investments in blockchain companies include KB Financial Group, United Overseas Bank, Citigroup, Goldman Sachs, and the Commonwealth Bank of Australia.

Blockchain technology, which serves as the underlying technology for cryptocurrencies, has many potential uses beyond payments, including smart contracts, supply chain management, and financial services. It provides accountability and transparency in recording transactions between parties in a verifiable and permanent way. Additionally, blockchain innovations are enabling new products and services, such as digital-only assets and tokenization of real-world assets.

The big financial institutions are recognizing the potential of crypto and blockchain technology. For example, on May 9, Goldman Sachs, BNP Paribas, Deloitte, and more than 30 firms announced the Canton Network, a new global blockchain network for financial market participants and institutional assets. Crypto and blockchain technology offer opportunities for small and medium-sized businesses (SMBs) as well, helping them reduce fees and operational costs, improve security, and gain better access to liquidity.

While the crypto and blockchain space is still evolving and comes with its own set of challenges, it is clear that it is here to stay and will play a significant role in the future of finance and technology.

Crypto as a stable investment option

Cryptocurrency is a highly volatile asset, with wild price fluctuations. However, it is growing in popularity, especially among younger investors. The crypto market has experienced a turbulent year, with the value of major cryptocurrencies falling and several crypto companies filing for bankruptcy. Despite this, crypto is still viewed as a stable investment option by many. This is evident by the fact that as of May 2022, 61 banks had invested at least once in the crypto ecosystem, indicating a stable outlook and driving more investment participation from banks.

One reason crypto is seen as a stable investment option is the emergence of stablecoins. Stablecoins are a type of cryptocurrency designed to maintain a fixed value over time by pegging their value to a specific real currency, often the US dollar. Unlike highly volatile cryptocurrencies such as Bitcoin, the price of stablecoins is meant to remain stable. This makes stablecoins a more predictable and reliable investment option. Examples of popular stablecoins include Tether (USDT), USD Coin (USDC), and Dai (DAI).

Another reason crypto is considered a stable investment option is the increasing regulatory framework being established. As the crypto market matures, we are seeing more regulations being put in place to protect investors. This is making crypto a less risky investment option. Additionally, the development of more investment instruments, such as options and futures on Bitcoin and Ethereum, provides investors with more opportunities to manage their risk.

Furthermore, crypto is seen as a stable investment option due to its potential for high returns. While there is a considerable downside, crypto can provide astronomically high returns overnight. This makes it an attractive investment option for those willing to take on the risk. Additionally, crypto assets can provide positive diversification effects, especially against rising inflation.

Lastly, the integration of crypto by traditional banks is making it a more stable investment option. Large banks such as JPMorgan Chase, Goldman Sachs, and Bank of America have launched crypto trading desks, providing investors with a secure gateway for crypto investments and protecting their funds. This integration by traditional financial institutions adds a layer of legitimacy and security to the crypto market.

In conclusion, while crypto may be a volatile asset, it is still viewed as a stable investment option by many. The emergence of stablecoins, increasing regulations, potential for high returns, and integration by traditional banks are all contributing factors to this stability. As the crypto market continues to evolve, it is likely that we will see more investors viewing crypto as a stable and attractive investment opportunity.

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