Cryptocurrencies as an asset class
London-based firm DLT Financial has unveiled plans to launch a 10-cryptocurrencies tracker fund with the aim of bringing the asset class into the institutional space.
The Gibraltar Stock Exchange saw the first European listing of a BitCoin ETI last July. A couple of months later, DLT Financial, a new company born out of London-based financial services group Tramonex, announced the further launch of the DLT10 Tracker Fund.
The instrument will track the DLT10 Index Series, established by Tramonex and covering 10 public implementations of Distributed Ledger Technology (DLT), most commonly known as cryptocurrencies.
“The index is a combination of the market cap, the correlation between those currencies, volatility to some extent as well as liquidity,” explains Dave Askey, chief technology officer of Tramonex.
Among other cryptocurrencies covered by the index are the bitcoin, the ethereum, the ripple and the stellar. Askey says that the index gathers six underlying themes: reserve cryptocurrency, smart contracts engine, new financial gateways, proof of stake altcoins, distributed internet, and micro niches.
“Our main objective is to bring that new asset class which is the DLT into the institutional investment space. Cryptocurrencies must hence become a legitimate asset class,” says Amine Berraoui, CEO of Tramonex.
“We believe that putting the DLT market under a regulatory umbrella will help its growth. Otherwise it will remain a niche market on the border of the investible universe,” he adds.
Tramonex’s CTO underlines that recent developments in the blockchain space have aroused the interest of investors in cryptocurrencies.
The company started to look more in-depth at distributed ledger technologies when it received a £250,000 grant from the British government for blockchain-based cross-currency payments.
“Investors are actively seeking to gain exposure to the blockchain ecosystem. They simply do not know how. At the moment, it’s very difficult to do this as most companies working on DLT are private.
“People do not know how to buy cryptocurrencies, plus they express concerns about their safety and it needs a strong expertise when it comes to storing and holding these currencies,” Askey says.
Liquidity is an important factor to consider in the universe of cryptocurrencies. The firm wanted to remain in a layer of the DLT space in which liquidity would be ensured.
The market capitalisation of some emerging DLT currencies (“coins”) picked for the index being very small, the company does not want to buy a huge amount of coins in the markets. It is looking to allocate $10m with the tracker even though the sum could be larger. The tracker will target a weekly or monthly liquidity.
Askey points out DLT Financial has not formalised at this stage a structured fund and talks are ongoing with a number of players including asset managers.
“The DLT market cannot currently absorb $1bn. We all acknowledge that today it would provide nice revenues. But the space remains very niche. If there is a race in the DLT area, it focuses on research. It is all about gaining knowledge about it and being ready for the coming steps,” highlights Tramonex’s CEO Berraoui.
The DLT10 Index Series returns for the period from 5 October 2015 to 18 August 2016 (+146.7%, dollar denominated) give a glimpse of how attractive gains could be for investors in the universe.
Askey adds that positive feedback has come from cryptocurrency players as it brings the space to a wider range of investors, and creates demand for their assets.
He says that pioneers in proposing investment strategies focusing on the DLT market will have a clear advantage on competitors.
Security issues stalk market discussions – cryptocurrencies are often linked to ‘virtual’ robberies – but Tramonex’s CTO observes they are “extremely secure from a technical point of view”.
This feature was first published in the November 2016 issue of InvestmentEurope.