Despite the punishing setbacks suffered by cryptocurrencies, fund innovation—including the development of products tracking a more diversified basket of coins—is set to continue, according to the latest issue of The Cerulli Edge―European Monthly Product Trends.

Cryptocurrency prices have retreated as a result of sector-specific challenges and wider economic concerns negatively affecting risk assets, especially in the technology and other high-growth segments, notes Cerulli Associates.

Assets under management in cryptocurrency exchange-traded products in Europe passed €10 billion (US$10.5 billion) in 2021, according to Morningstar data, propelled by rising prices and a flurry of launches. Nevertheless, market volatility is taking a toll on investor sentiment. “Heightened volatility in the sector has deterred investors, especially larger actors constrained by strict risk models,” says Fabrizio Zumbo, director, European asset and wealth management research at Cerulli.

This is not the first time the cryptocurrency sector has exhibited a boom-bust sequence. For example, the price of Bitcoin fell by nearly 65% in early 2018 after a standout year in 2017, which saw the asset return investors more than 1,300%.

That said, Cerulli research indicates that much of the activity in the space in Europe has so far been dominated by retail investors. “Cryptocurrency is increasingly coming up in conversations with financial advisors, particularly wealth managers and family offices serving high-net-worth individuals,” says Zumbo.

The cryptocurrency fund universe in Europe has been occupied by smaller managers running niche strategies. However, some managers have launched thematic equities-based products targeting companies that could benefit from the growing use and application of blockchain, the digital infrastructure underpinning the cryptocurrency market.

For many investors in Europe—a hotspot for the consideration and implementation of environmental, social, and governance (ESG) factors—the amount of energy used by cryptocurrency companies to maintain their operations poses a major concern. In response, some cryptocurrency platforms have sought to address ESG concerns by various means, including adopting a consensus algorithm that is significantly more energy efficient, albeit at the cost of some decentralization.

“The outlook for the cryptocurrency market remains uncertain, at least in the short term,” says Zumbo. “Cerulli expects several managers and investors around Europe will remain on the sidelines, seeking to better understand the sector amid current risk-off market conditions and awaiting greater regulatory clarity before making any decision to act. However, we expect product innovation to continue.”