The spot Bitcoin and Ethereum ETFs in the United States ignited a new wave of institutional investment as previously sidelined buyers have taken advantage of this new asset class. The inflows thus far have been remarkable, and the development of exchange traded funds in the U.S. market is poised to accelerate.
Over the course of 2024, we have seen the tremendous opportunity that the digital asset industry has moving forward with the approval of spot Bitcoin and Ethereum ETFs in the United States. In the weeks following the U.S. presidential election, digital asset fund flows in America continued to grow exponentially. During the week of the election following Donald Trump’s successful campaign for another term, the U.S. saw $1.95 billion in inflows into digital asset ETFs, with the year-to-date total in the U.S. reaching $29 billion. But now that these products have been introduced to the market, where do we go from here?
While the United States was late to approve regulated crypto investment vehicles relative to its peers, it stands to benefit from the wealth of experience accumulated in European markets over the past decade. With a new and seemingly favorable administration set to take the reins in 2025, what could the digital asset industry expect the ETF landscape in the U.S. to look like? Having played a key role in advancing publicly traded crypto products in Europe as CEO of CoinShares, reflecting on the European experience can help our U.S. counterparts navigate this new terrain and more seamlessly develop their own crypto markets.
Europe's Pioneering Role
Europe has long been at the forefront of adopting crypto asset classes, setting global standards for safe entry into the crypto ecosystem for both institutions and the public. Europe’s first regulated crypto product launched in 2015, on the Nasdaq Stockholm, with the debut of a Bitcoin-backed ETP. This milestone paved the way for further innovation, with Europe's first Ether ETP following in 2017.
The digital asset ETP approval regulatory journey in Europe has been complex and multifaceted. The original CoinShares XBT Provider Bitcoin ETP, followed a structure similar to Gold ETPs in Europe. However, this original product was the sole digital asset ETP available for two years, before Switzerland's Six Exchange provided a pathway for others to launch Bitcoin (and eventually other) ETPs on the exchange. Following this development, Germany’s Deutsche Börse AG followed suit in 2020, leading to a large capital infusion into digital asset ETPs, providing significant AUM in these products for the first time since its inception in 2015.
Since these initial product launches, the European market has continued to expand and now offers over 100 different products, referencing roughly 40 different underlying assets from 20 different issuers. The landscape now includes physically backed ETPs, synthetically-replicated products, and blended offerings that provide exposure to multiple cryptocurrencies or crypto-related assets. Companies such as CoinShares, 21Shares, WisdomTree, VanEck, Valour, Invesco, Hashdex, and ETC Group, amongst others, now offer an assortment of crypto ETP products to European investors.
While the growth of the crypto ETP market in Europe has faced challenges, including an ever-evolving regulatory landscape, these obstacles have driven innovation and led to the creation of more sophisticated products and robust infrastructures. Europe's proactive approach to creating a regulatory environment that balances innovation with investor protection has been instrumental in the growth of crypto ETPs. As the U.S. market develops, finding this balance will be crucial for sustainable growth and investor confidence.
Infrastructure Development
While crypto ETPs function similarly to their United States ETF counterparts: both are open-ended and exchange-traded. As a result, considering and implementing the appropriate infrastructure is critical to ensure longevity and accessibility. This includes accessing appropriate trading venues, engaging market makers and regulated custody solutions, and ensuring adequate on-exchange liquidity.
Major European exchanges like Deutsche Börse Xetra, SIX Swiss Exchange and Euronext now list crypto ETPs, providing investors with secure and streamlined methods to invest in cryptocurrencies. This infrastructure development has been crucial in fostering trust and facilitating broader adoption.
The development of infrastructure didn’t happen overnight. It required close collaboration between ETP issuers, exchanges, market makers and regulators. Each player in the ecosystem had to adapt to the unique challenges presented by crypto assets. For instance, exchanges have been at the forefront of working with their regulators to approve digital assets as eligible underlyings
As the market has matured, we’ve seen a marked improvement in liquidity across European crypto ETP offerings. This has been achieved through a combination of factors, including increased competition among issuers, growing investor interest and the entry of established financial institutions into the crypto space. Liquidity provisioning has been another critical area of development. In the early days of crypto ETPs, liquidity was a significant concern for institutional investors. However, as the market has matured, we’ve seen a marked improvement in liquidity across European crypto ETP offerings. This has been achieved through a combination of factors, including increased competition among issuers, growing investor interest and the entry of established financial institutions into the crypto space.
The Importance of Multiple Custodians
One of the most critical lessons learned is the importance of having multiple custodians for crypto ETPs. Crypto markets operate 24/7, and technical issues can occur at any point in the trading process—even on major exchanges like the NYSE.
To minimize the impact of such technical glitches, asset managers must have robust backup plans in place. This includes arrangements with multiple custodians to ensure trading and settlement can continue with minimal disruption. For instance, if a major custodian like Coinbase were to encounter technical difficulties, CoinShares' experience has taught us to be prepared with alternative custody solutions.
Looking Ahead
As the global leader in financial markets, the U.S., following Trump’s election victory for another term as president, is well positioned to scale its domestic market for digital asset ETFs, and a favorable regulatory environment primed for innovation. With the advantage of hindsight, the U.S. can leverage Europe's decade-long experience with crypto ETPs to avoid pitfalls and accelerate crypto adoption. The key takeaways include:
- Understanding and catering to diverse customer needs with a range of product offerings.
- Developing robust infrastructure, including reliable trading venues and liquidity providers.
- Working closely with regulators to create a balanced environment that fosters innovation while protecting investors.
- Implementing strong risk management practices, particularly in terms of custody arrangements.
By leveraging these lessons, as the industry enters another bull cycle, the U.S. can accelerate the development of its crypto ETF market, providing investors with secure and regulated access to this emerging asset class. The global crypto landscape is evolving rapidly, and collaboration between markets will be crucial.
Jean-Marie Mognetti is CEO of CoinShares
