The Next Innovation in Cryptocurrencies Won't Come from the Introduction of a Solana ETF

Asset managers say they're more focused on other ways investors can diversify their portfolios with crypto.

The launch of bitcoin exchange-traded funds (ETFs) earlier this year was a major milestone for the cryptocurrency industry, but asset managers are now looking ahead to the next wave of innovation.

While some crypto enthusiasts are speculating about which coin will be next to be added to an ETF wrapper, asset managers at the Wyoming Blockchain Symposium in Jackson Hole said the broader goal is to help investors diversify their portfolios with crypto.

"As we think about how to educate investors about this broader ecosystem, it's not individual token by token, but rather … how do we think about portfolio construction and from there, how do we create exposures representing different sectors within this growing ecosystem," said Cynthia Lo Bessette, head of digital asset management at Fidelity Investments. "There's an opportunity for us to be able to add value beyond just individual access to just some of the largest crypto tokens."

One area of focus is the development of actively managed crypto products. In May, Galaxy Digital announced a partnership with State Street to develop and launch active trading products linked to digital assets.

"That is not about the next coin, it's about the 75 securities that are now linked to crypto – the fact that there are futures, options, crypto ETFs, all kinds of exchange traded vehicles globally," said Steve Kurz, global head of asset management at Galaxy Digital, in an interview with Blockworks at the symposium. "The accordion has expanded so much in just one year that you can start to have active strategies."

"While that's not what I think the average crypto asset manager would say the path would have been, that is a path that brings crypto awareness and crypto education through a different set of tools," he added.

In addition to the US, there are a number of Solana ETPs available to investors in Europe, and ETFs tracking the price of spot bitcoin were available in Canada in 2021.

Kurz said that while there is still a market for single-coin products, especially for those who are bullish on a particular coin, asset managers are increasingly looking to diversify their clients' crypto exposure.

"If you're looking at the profitability of the asset management business in a platform sense, over the next three or four years, it's about moving into [alternative] products," Kurz said. "Hedge funds, liquid token funds, venture funds – those are all models that are being tested."

Many investors and wealth managers who are bullish on bitcoin generally recommend a small allocation — between 1% and 5% — to add risk to a portfolio without subjecting it to too much of the cryptocurrency's notorious volatility.

Having different crypto-linked securities coming to market, however, could give asset managers an opportunity to shake up that standard and lift client expectations.

"Active management becomes part of the conversation, and your differentiation isn't on fees or total cost of ownership, it's now on what strategies are you creating, what alpha are you generating – and that's that's when we know we've actually achieved something in terms of it becoming an asset class," Kurz said.

"You really haven't had a true asset management industry in crypto, it's been a cottage industry until the bitcoin ETF happened," he added.