Europe’s current “risk-off” market environment is not a nurturing one for crypto assets and net flows have been negative year to date. However, it is too soon to dismiss the chance of significant asset growth, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.

Cerulli Associates believes that the launch of the region’s first spot bitcoin exchange-traded fund (ETF) could reignite interest in crypto assets.

“The tide could still turn for crypto exchange-traded products (ETPs) if prices stabilize enough to satisfy potential institutional investors,” says Fabrizio Zumbo, director, European asset and wealth management research at Cerulli.

Cryptocurrency ETP assets under management (AUM) in Europe were €4.4 billion (US$4.7 billion) as of August 2023—a little more than half what they were at the end of 2021.¹ Aside from a generally challenging market environment, the crypto market was hit by the collapse of the TerraUSD stablecoin, the Terra Luna coin, and, even more significantly, the FTX crypto exchange.

Nevertheless, the number of cryptocurrency ETP launches did not abate. There were 55 new listings in 2022, following 54 in 2021 and 10 the year before. ²

This year, crypto assets have seen a very positive recovery of value, but net flows have been negative and enthusiasm for new launches has diminished―there were just six new Europe-domiciled crypto ETPs over the past eight months.

However, despite the muted interest, there are a number of developments that could spark a revival in demand. One is the supply of crypto ETFs. Crypto products in the European market are structured as exchange-traded notes, rather than holding the underlying assets directly. Yet London-based Jacobi Asset Management has launched Europe’s first spot bitcoin ETF. And, at the time of writing, BlackRock’s proposed equivalent was awaiting regulatory approval in the U.S., alongside six other applicants.

“Cryptocurrencies have generally been viewed through the lens of retail investors. Yet the ETF issuers in Europe that Cerulli surveyed toward the end of last year believe there could be demand from institutional investors: 29% ranked the institutional channel first for expected cryptocurrency ETP demand. Just 9% ranked independent wealth managers first for expected demand, but 55% ranked the channel second or third. Essentially, ETF issuers believe there could be interest in these products among both asset owners and private clients,” says Zumbo.

European institutional investors may have discounted digital assets on environmental grounds, but some managers with products in this space are trying to address the energy-intensive nature of crypto assets.

Another potential positive is that cryptocurrencies are gaining traction in developing countries that have suffered hyperinflation or where access to traditional banking institutions is limited. Further entrenchment of digital currencies in emerging markets could be used to make a long-term investment case.

¹ Source: Morningstar

² Source: Morningstar