Coinbase found another way to make money off cryptocurrencies with its custodial services for institutional investors. Announced this week, Coinbase Custody will charge sovereign wealth funds, traditional hedge funds, family offices, and others 10 basis points to store digital assets, such as bitcoin, litecoin, ethereum, and ERC 20 tokens. For some, there may be cheaper way to own digital assets.
At this moment in time, cryptocurrencies acts less like currencies and more like commodities. Often bitcoin is called digital gold; a storer of value rather than means of payment. This is due in part to the limited transaction processing of the bitcoin protocol. But owning digital asset presents custody issues for institutional investors.
The situation is no different than fifteen years ago when institutional investors wanted to own real commodities, such as industrial metals and agricultural products. As with digital assets, owning real assets is challenging due to storage, transportation, and insurance costs. Back then Wall Street solve the challenge by providing institutions with synthetic exposure with derivatives: commodity swaps, exchange traded futures, and structured notes.
So it is ironic, that this week the CME announced the terms of its BTC futures contracts. The CME is home to many of the future contracts that make up the commodity indices that institutions invested in many years ago; this includes the Goldman Sachs Commodity Index. CME’s bitcoin futures could be listed in the second week of December and will required more margin than “traditional” contracts.
While sovereign wealth funds or hedge funds may opt for real digital assets, others may want only synthetic exposure. CME’s BTC futures contracts offer another way for institutions, including mutual funds, to provide bitcoin exposure by rolling over the futures contracts, much the same way as with traditional commodity futures. BTC futures can also simplify ownership for retail investors with the creation of synthetic bitcoin exchange traded funds; one of which was recently proposed by Proshares.