Now that cryptocurrencies are also present in traditional regulated financial markets thanks to ETFs, in theory, banks could also invest in them.
Although it is often believed that banking activity focuses on the custody of deposits of individuals and companies, and on credit, in reality banks also operate as investors in financial markets.
Crypto ETFs and other funds: access for banks
ETFs are literally exchange-traded funds, which are funds that can be traded on the stock exchange.
Technically, they are funds that issue shares, which in turn can be bought and sold in traditional financial markets.
However, there are not only exchange-traded funds, but there are also many other different types of funds.
One of them, for example, is Sovereign Wealth Funds (SWF), which are state-owned investment funds often financed by central banks. This is a type that belongs to the large category of so-called publicly owned sovereign funds.
Through the FRS, central banks and, therefore, States, can also invest in the markets.
China alone owns and controls four of the world’s top ten sovereign wealth funds.
SWF investments
According to a study by TheCityUK, in 2023 funds managed worldwide by sovereign wealth funds reached a total value of approximately $12.7 trillion.
For example, funds managed by the world’s largest asset manager, BlackRock, on the same date were worth about $10 trillion.
Therefore, SWFs, as a whole, are an extremely important entity in the financial markets and cannot be ignored at all.
In 2023 alone, the Sovereign Fund invested $125 billion worldwide.
Although this figure turned out to be 20% lower than in 2022, on average from 2018 to 2023 the annual investments of the FRS grew by 16.4%.
At the moment, there is no certain news about SWF investments in crypto ETFs; However, if central banks wanted to invest in cryptocurrencies without having to include them directly on their balance sheets, they could do so through these vehicles.
TheCityUK report reveals that, overall, assets owned by sovereign wealth funds consist of 32% in shares, 28% in fixed income instruments, 10% in direct strategic investments, 4% in cash, but a 26% in alternative investments.
The 26% AUM (assets under management) ratio for alternative investments appears to leave ample room for cryptocurrencies.
The Advantage of Crypto ETFs for Banks
These sovereign wealth funds have a fairly difficult time investing directly in crypto markets, to the point that it is reasonable to assume that they simply do not do so.
Instead, crypto ETFs are not only derivatives present in traditional financial markets alongside other ETFs, such as gold and oil, but they also happen to be fully regulated financial products.
Therefore, the SWF may not have any particular problems investing in crypto ETFs, provided of course that they have made the decision to integrate them into their own assets.
However, according to recent statements from BlackRock, the issuer of the world’s leading Bitcoin ETF (IBIT), to date, relatively few people have still invested in crypto ETFs.
“We are really at the tip of the iceberg with Bitcoin and especially Ethereum. Only a small fraction of our clients own ($IBIT and $ETHA), so that’s what we’re focused on (rather than launching new altcoin ETFs)” – BlackRock’s Jay Jacobs on ETFs in Depth.
– Eric Balchunas (@EricBalchunas) December 12, 2024
This suggests that in the future many other entities that are currently completely out of the crypto market could enter it indirectly thanks to ETFs.
Banks and cryptocurrencies
For a central bank, it might make sense to allocate some capital to Bitcoin and, to a lesser extent, other cryptocurrencies as well.
In particular, as BlackRock always maintains, for a classic 64/40 portfolio, it might make sense to allocate between 1% and 2% in crypto ETFs.
In reality, sovereign funds do not have the classic 60/40 portfolio, also because they allocate around 10% to direct strategic investments. However, excluding these and cash, they have 33% of the rest allocated to fixed income products, and the remaining 67% to variable income and alternative investments. Therefore, it is not a very different allocation if direct investments are excluded.
At this point, it is at least possible to imagine that of that 26% of capital invested in alternative instruments by FRS, a small part, in theory, could also be invested in crypto ETFs.
Today, it may still be a little premature to imagine it, but at least now it is possible.
The impact on crypto markets
It must be said that 1% of 125 billion dollars is 1.25 billion, a figure that, annually, is much lower than, for example, that invested by MicroStrategy alone in 2024 in Bitcoin.
Therefore, on a strictly financial level, its entry into the crypto market through ETFs could hardly have significant consequences.
However, it could have a quite different impact on the narrative, especially if these central bank-controlled funds decided to invest in Bitcoin as a strategic reserve.
SWFs are not activities dedicated to trading, but true investment funds that invest mainly to build a portfolio. In fact, this is why their overall AUM remains so high.
While, on the one hand, it still seems very unlikely that central banks would be able to purchase Bitcoin on crypto markets and hold them in non-custodial wallets, they might be less hesitant to authorize their SWFs to allocate a small percentage of capital to crypto ETFs.
Today this turns out to be just a hypothesis and nothing more, but if on the one hand it may seem improbable, on the other it finally seems at least plausible.
