Asia Cryptocurrency Fintech Spotlight

Here Come the Institutions: The Rise of Asian Crypto Investment Funds

To the passive observer, the United States – specifically Silicon Valley – might be mistaken for Bitcoin’s nerve centre. Nothing could be further from the truth. Bitcoin is everywhere, a currency without a border, an asset belonging to everyone and no-one. In any case, much of the power behind Bitcoin resides in Asia, where 60% of the network’s collective hashrate is controlled by Chinese mining pools. The continent is also home to several dominant digital asset exchanges and some of the world’s wealthiest bitcoiners.

Institutional capital has flooded into the cryptocurrency market in recent months, with both MicroStrategy and Tesla adding a billion dollars of bitcoin to their balance sheets. While the western media sat bolt-upright in their chairs and widely reported these buy-ins, the goings-on in Asia are just as newsworthy, as blockchain-focused hedge funds proliferate at a rapid rate, deploying capital through tokens and equity stakes. Southeast Asia’s biggest bank, DBS, has even launched its own blockchain-based digital exchange, providing accredited investors with tokenization, trading and custody services.

Whether it’s financial services giants launching crypto prime brokerage services, dedicated venture capital firms bootstrapping blockchain startups, or advanced state-backed crypto-assets like China’s digital yuan pilot, the region’s appetite for crypto is insatiable. As with the United States and Europe, there are geographical pockets where institutional interest reliably concentrates: notably Hong Kong, Singapore, Japan and South Korea. If not for China’s historically hardline attitude towards crypto, Beijing might have joined the shortlist.

Asian Firms Capture Institutional Demand

One of the latest Asian companies to tumble down the bitcoin rabbit hole is Henyep, a Hong Kong-headquartered financial giant with $35 billion in annual turnover. Last month, the company confirmed the creation of a subsidiary, Q9 Capital, tasked with meeting rising institutional demand for crypto from high-net-worth individuals and family offices. Q9 Capital will run a comprehensive over-the-counter (OTC) trading desk to facilitate clients’ trades and provide digital savings products and custodial services.

Stack, a provider of cryptocurrency trackers and index funds, also expects to surpass $2 billion in assets under management (AUM) this year having launched Asia’s first institutional-grade Bitcoin Index Fund last January. Co-Founder Matthew Dibb cited “fears of a global recession combined with deteriorating trade relations globally” after launch, but that was pre-pandemic, with bitcoin valued at less than $10,000. Since then, BTC has 5x while central banks have printed trillions to counter the economic impact of Covid-19. If $2 billion of AUM was the target in January 2020, it has surely increased since then.

While Asia has long possessed the infrastructure to service those already familiar with cryptocurrency, it is rapidly developing the sort needed to onboard clients who are completely new to the industry, and who are keen to either storing wealth in bitcoin, fund innovative blockchain projects, or speculate on price (derivatives trading). Needless to say, there are many moguls and magnates throughout Asia keen to flex their financial muscles on the crypto market. Between Beijing and Shanghai, there are close to 200 billionaires, with Hong Kong and Shenzhen rounding out the top 5 wealthiest cities: New York is the only non-Asian metropolis to make the cut.

“While this current bull run is mainly led by the institutional players in the West – the likes of Paul Tudor Jones, Stanley Druckenmiller, MassMutual, Grayscale, Square, MicroStrategy, and PayPal – Asia still holds the vast majority of Bitcoin mining capacities, has the largest number of Bitcoin whales, and possesses the most progressive regulatory environment,” observes Ben Zhou, CEO of Singapore-based derivatives exchange Bybit.

“This side of the Pacific hosts the best lab conditions for innovation and democratization through the implementation of scalable solutions. At Bybit, we are committed to creating a fair, transparent and efficient trading environment, and crafting a mass adoption-ready, future-proof platform for the exchange of value.”

Bybit has capitalized on fervent demand in the region since launching in 2018. According to research firm Messari, Asia accounts for almost half of all digital asset trading including 90% of all volume above $10,000. East Asia, particularly China, is said to engage in more short-term trades involving a wide variety of assets, whereas the focus in North America is more on long-term bitcoin holdings. Amazingly, trading activity in Asia is equivalent to the U.S. and Europe combined, with Asian companies particularly fond of derivatives – accounting for 98% of ETH and 94% of BTC futures volumes.

Pouring Napalm on a Bonfire

According to Jehan Wu, Founder and Partner of Hong Kong-based blockchain investment and advisory firm Kenetic, the multiplication of trading platforms and primitives is the cause for growing institutional interest in the continent. “By expanding the different options and derivatives in crypto, traders are basically pouring napalm on a bonfire,” he says. “And with the amount of institutional interest at an all-time high, we can expect major traditional hedge funds to pile in during 2021 to further legitimize the space and increase total market cap.”

Lest anyone think it’s just tycoons FOMOing into the crypto market, adoption is rising in countries such as Vietnam and the Philippines; according to a recent Statista survey, 21% of Vietnamese and 20% of Filipinos said they used digital assets last year. As in Africa, remittance is a major use case, with the Philippines’ Central Bank having allowed multiple digital asset exchanges to operate as “remittance and transfer companies” in the country. The government of Vietnam has also set up a research group to develop and scrutinize policy proposals related to crypto-assets.

There are perhaps two narratives to focus on, then: crypto (specifically bitcoin) for billionaires and crypto for the masses. Naturally, due to the volumes concerned, the institutional narrative will be most consequential. The growing involvement of wealth management funds is likely to push the price of bitcoin higher while strengthening the asset’s reputation as a store of value uncorrelated with traditional markets.

“Participation in Bitcoin by institutional investors in Asia is heating up significantly,” observes Thor Chan, CEO of Hong Kong-based exchange AAX. “As we see bitcoin as well as stock markets chart new all-time highs, so institutional investors are witnessing record trade volumes, record amounts of assets under management, and an allocation to bitcoin by institutional players is becoming somewhat more normalized.

“However, while catching up, Asia still lags behind the US. MicroStrategy’s conversion to Bitcoin, as well as Tesla’s recent allocation of $1.5 billion USD to this superior store of value, instills confidence. Apart from high-net-worth investors who might seek bitcoin for their private holdings, we’re now also picking up on corporate interest.

“For AAX or any serious exchange to capture this market, however, licensing will be vital. Top-tier exchanges are especially eyeing Singapore and Hong Kong in this regard. Regulatory developments in these jurisdictions are key to unlocking the next growth explosion.”

Defi and Regulation: Two Battlegrounds

The growth of defi is bound to have piqued Asian investors’ interest. Over the past year, the decentralized finance sector has attracted tens of billions of dollars in value, with a range of trustless protocols specializing in lending, staking, trading, insurance and other primitives. Vietnam-based blockchain investment company Coin98 Ventures just announced a $5 million fund to support defi development on the Solana blockchain in Southeast Asia. Digital asset advisory firm Spartan Group, meanwhile, recently launched a $50 million venture fund for investment in defi systems that “bridge the gap between Eastern and Western markets.”

Irrespective of defi’s potential, regulatory developments will be keenly monitored by both existing and would-be investors. As more traditional financial firms become involved in the cryptoconomy, legislative pressure is likely to mount, in Asia and beyond. Qualifications for retail trading are far from standardized, with different rules in different territories. National regulators will, above all, look to protect new investors with little or no knowledge of cryptocurrencies, and to impose requirements such as Anti-Money Laundering/Know Your Customer (AML/KYC) that are common with major banks.

It’s not just regulation of trading platforms that matter, either; in the past, governments have urged local authorities to restrict power supply to Bitcoin miners. If there was a crackdown on, say, China-based mining operations, the effect on bitcoin’s price would be catastrophic. India is considering banning investment in any and all cryptocurrencies, meaning citizens cannot even transact via foreign exchanges. 

On a more positive note, significant institutional inflows – complete with the rising tax liability linked to digital assets (governments will always want their cut) – should facilitate a manageable framework. Bitcoin may not yet be “too big to fail” but having surpassed a $1 trillion market cap for the first time, it’s getting closer.

No-one knows how the industry will look in ten years. But through a combination of its mining pools, hedge funds, exchanges, banks and regulators, Asia will certainly have its say.


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