21Shares: conventional firms are entering crypto space as it moves towards consolidation

21Shares launched the world’s first Solana ETP on the Swiss stock exchange earlier this month, in what is the latest novelty in an ever-evolving landscape. The firm was also the first crypto issuer to list a fully collateralised, 100% physically backed bitcoin ETP on most German exchanges back in 2019, and is also the only issuer to have four crypto ETPs listed on Xetra.

“The landscape has always been focused generally on Bitcoin, Ethereum and Ripple - these are all blockchain tokens or blockchain cryptocurrencies,” says Laurent Kssis (pictured), managing director at 21Shares, adding that although there is a case and a narrative for the top 10 cryptocurrencies in the market, generally speaking Bitcoin has always overwhelmed the top 10 weighting with a ratio of eight to one.

The focus is moving slightly from the conventional top 10 cryptocurrencies into the DeFi space

“That overweighting has somehow distorted the market until now. We see several cryptocurrencies evolving as clear leaders in the market because they are decentralised and offer enterprise solutions. As a result, we are now even looking at a basket without Bitcoin and may be even without Ethereum.”

Solano and Polkadot are good examples of new activities and protocols being built around blockchain technologies. These are main cryptocurrencies, not tokens, ICOs or some sort of foundation that has been built on the back of a company (mainly Swiss).

“The focus is moving slightly from the conventional top 10 cryptocurrencies into the DeFi space. The story is that we're seeing a lot more activities, a lot more enterprise solutions being built around decentralised finance,” says Kssis.

Plans

The firm’s ambition is to capitalise on this demand and work with regulated exchanges that are promoting the cryptocurrencies used on its listed ETPs.

“Investors should be aware that we rely on the market makers to make a market quote and if they can’t hedge the underlying asset, then there's no point in having a product because they won't be able to make tight spreads, and there won't be any liquidity,” says Kssis. “We only use cryptocurrencies for which market makers can access tools in order to properly and efficiently hedge products.”

The issuer will continue to focus on bringing new ETPs to the market but is seeking to expand into the token market by leveraging the combined strengths of sister company Amun – a token company - with 21Shares (the regulated listed structured product business) to list two DeFi indices aimed at the ‘libertarians’ of the crypto market.

“We've sort of tiptoed into the DeFi space by launching a token which is an index of DeFi tokens before we actually launch an ETP,” says Kssis.

“There is also a lot of opportunity around yield farming. We want to capture these returns and make them available to our ETP investors but before we move into DeFi we need to be mindful that still today education is needed just on Bitcoin and Ethereum,” says Ksiss.

“In our experience, a lot of the clients we deal with have just got a grasp of Bitcoin blockchain, but when you get into Ethereum people are struggling to understand.”

Organic v acquisition

A number of firms out there are trying to build blockchain or crypto infrastructure and capabilities, but this is not an easy task and as we have seen with the Deutsche Boerse acquisition of Crypto Finance which indicates the beginning of a trend.

“[I expect] large organisations moving into the crypto and DeFi space by buying disruptive companies active in the market over the next 18 months,” says Kssis.

“As a disruptive issuer of crypto ETPs, we can see major ETF and structured product issuers tiptoeing into the market and listing products that don’t really get much traction. Because these players are not really focused on this part of the industry, we think some of them might actually buy a specialist issuer to consolidate their activity and grow their assets.”

21Shares has around US$1.4 billion in assets despite the fall in crypto prices, which is quite substantial for an industry that has only been around for a few of years.

According to Kssis, the Deutsche Boerse initiative shows there is appetite from different market players to enter the crypto space to enhance their offering and be able to compete with other players.

One of the problems exchanges face, however, is that they are restricted by the 9-5.30 trading hours whereas a crypto exchange is trading 24 hours a day, weekends, and globally.

“That activity can bring a lot of extra volume,” says Kssis.

For instance, Binance trades five times more volume than its main competitor Coinbase. The two biggest crypto exchanges in the world with a combined value of US$60-70 billion of market capitalisation.

“When you put this into perspective, you realise all of these exchanges have a very high interest in moving into the custody of crypto, in moving into trading venues to remain competitive,” says Ksiss.

The Deutsche Boerse move seems to have been aimed at fending off increasing competition from Boerse Stuttgart which is a more flexible exchange because its MTF status and sister business called Bison, which already offers crypto as an exchange 24 hours a day.

With the acquisition, Deutsche Boerse will be able to deploy that kind of activity overnight, and compete head on with Boerse Stuttgart, and probably also with SIX exchange which also covers cryptos via SDX, according to Kssis.

“We're moving towards a consolidation where conventional exchanges, custodians and intermediaries buy disruptive companies in the crypto space to expand their activities,” he concludes. “This is an indication that perhaps it is easier or more efficient to enter this space and grow by acquisition than organically building these capabilities.”