Digital Asset Bundles: The next ETFs — but better!

Exchange traded funds or “ETF” are for many investors the investment vehicle of choice. Being tradable on secondary exchanges, highly liquid, and highly cost efficient gives these investments a leading edge. Consequently, we can expect to soon see something very similar in the digital asset world: digital asset bundles.

Digital asset bundles stand good chances to revolutionize digital asset investments just as ETF disrupted the traditional funds world. Let’s connect the dots.

ETFs

Today more than USD 7 trillion are invested in exchange traded funds (ETFs) globally. The five gorillas of the industry BlackRock, Vanguard, State Street, Invesco and Charles Schwab jointly make up nearly 90% of the market. What is little known, however, is that the ETF is a rather young product category. It is merely 30 years of age.

An ETF can be considered a bundle of assets tracking specific market indexes, sectors or commodities and trade on major stock exchanges. At the same time ETFs can hold a range of investment products and are — similar to shares —easy to buy and sell. But this is not where the advantages of ETFs end as they provide a variety of additional advantages: they can provide simplified, built-in diversification across investment products groups such as stocks, bonds and commodities. The same goes for diversification across geographies. If desired, however, the investor can also focus investments in specific geographies or topics. What is more, all of this can be achieved at extremely low fees, rendering ETFs an affordable choice for many investors on institutional as well as retail level.

In view of these advantages, namely simplicity, versatility, liquidity and cost-efficiency, the USD 7 trillion investment in ETFs may not come as such a big surprise. Yet, if we use the uptake of ETFs as an indicator of what we will see in the future, bundles of digital assets will see a tremendous uptake.

Bundles of Digital Assets…

Whether a collection of digital assets will be called token basket, digital asset array, digital nexus, token bundle, digital asset box or similar – this type of packaging is set to have a similar triumphal procession as ETFs had.

Despite some teething troubles it is fair to say that digital assets — let it be utility or security tokens — will be the investment vehicle of the future. In the long run it will simply not make sense for the financial services industry to rely on an infrastructure that is essentially based on the notion of paper. Given that a far more efficient infrastructures exist, namely distributed ledger technologies (DLT), it would not make sense for banks and financial services firms to cling to processes that emerged in times when banks still kept hand-written ledgers. Consequently the so-called infrastructure inversion will take hold of the financial services industry, resulting not only in new assets being directly issued on DLT infrastructures, but also causing traditional assets to be tokenized and traded side-by-side to novel crypto products. Hence, the financial services industry will sooner or later not be able to bypass the topic of tokenization.

This development will present asset and wealth managers as well as private banks with an entirely new challenge: how can I provide investors with access to new and old types of assets in a simple, versatile, liquid and cost-efficient way? Clients will not only ask for asset exposure, but also for a simplified and diversified one. How can this service be provided in analogy to ETFs? A set of tokens, let’s say of the largest 20 crypto currencies, can yield exactly that. Other investors may want to put their money behind the Decentralized Finance (DeFi). An assorted box of tokens from the field of DeFi may exactly serve their need. Others may want to invest in art. A curated collection of Nonfungible Tokens (NFT) of art may be the ideal solution here.

… as well as Traditional Assets

As those bundles of tokens will be traded on crypto exchanges, liquidity will be ensured, just as is the case with ETF. The same goes for traditional investments: once shares have been tokenized asset managers will be able to assemble bundles of shares, that can be sold in primary markets and traded on secondary ones. On a DLT infrastructure a basket of the top 30 US shares could be created and this Dow Jones Digital Asset Bundle would be tracking the DJIA extremely closely on secondary markets that may well be regulated such as the Swiss SDX.

Advantages of Digital Asset Bundles

Given that DLT has the potential not only to do away with several layers of middlemen, but also to streamline legal and compliance affairs, it can be expected that the creation and trading of digital asset arrays will be even more cost-efficient than ETFs.

If those advantages are not sufficient to replace ETFs, there is one more significant advantage: token baskets can be created in such a way that the underlying assets are stored on the wallet of the user. In this way counterparty risk is virtually reduced to zero. Think of ETFs and managed accounts: tradeable bundles of digital assets have the potential to combine the best of both worlds.

Outlook on Digital Asset Bundles

With the arguments simplicity, versatility, liquidity and cost efficiency ETFs carved into a large share of the fund market previously dominated by mutual fund companies. For the same reasons plus reduced counterparty risk the concept of digital assets bundles stands all chances to carve into a large share of the ETF market in the years to come.h

Dr. Patrick Schueffel

Dr. Patrick Schueffel is Adjunct Professor at the Fribourg School of Economics, Switzerland. His research focuses on banking, finance and entrepreneurship. As a consultant and founder, he contributes to various Asian-European crypto projects. Before his three-year stay in Singapore, he worked for years in banking in Zurich. He holds several university degrees.