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Count this as a potential sign that the institutional investment world is cozying up to the burgeoning decentralized finance market. 

Crypto asset manager Bitwise announced Wednesday the launch of the Bitwise DeFi Crypto Index. The new fund will provide a vehicle for accredited investors to make a diversified bet on DeFi through the structure of a security, which might make them more comfortable with the nascent market known for its hacks and rug pulls. 

The DeFi market – which spans lending, exchange, and insurance protocols – has grown at a fast-clip over the last year, with the notional value locked in such protocols soaring from under $1 billion at the beginning of 2020 to $56 billion this month.

Indeed, the market has even captured the attention of Wall Street heavy hitters like AllianceBerstein, which penned an analyst note saying that DeFi protocols “have begun recreating financial services, including lending/borrowing, exchanges, derivatives, prediction/betting markets, and more.”

As for Bitwise’s new fund, the firm has been prioritizing its launch since the roll-out of its Bitwise 10 product on the public over-the-counter markets at the end of December.

“It’s been hard not to notice and get excited by what’s been happening in the DeFi space,” said Bitwise chief investment officer Matthew Hougan. “There’s a huge amount of venture capital pouring into the space, a whole lot of developer activity moving into this space.”

The fund is launching with a small amount of seed assets with subscriptions occurring twice a week. Initially, the constituents of the fund will include Uniswap, Aave, Synthetix, Maker, Compound,  UMA, Yearn.Finance, 0x, and Loopring. 

Inclusion into the fund is predicated on a number of factors, according to Hougan, 

“Effectively the big question is ‘does this compete directly with a business in the traditional financial industries sector,'” Hougan said. 

There also needs to be evidence of real use of the crypto-asset as well as be supported by top tier custodians and exchanges. 

In the long-term, Hougan isn’t hundred percent certain whether the product will be quick to take-off, but he said that ultimately it could follow a similar path as BITW and trade over-the-counter for institutions and retail alike.

“It took us a long time to educate our audience on the Bitwise 10,” he said. “The market cap is a tiny fraction but the education curve might be faster.”

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Quick Take

• In the crypto markets, both on centralized and decentralized markets, stablecoin yields are high compared to traditional markets. 
• This is mainly due to a supply constraint for crypto dollars and a bull market — with BTC price up 374.9% in the past year.
• Funding rate arbitrage has the highest yield in centralized markets. Yield farms related to the AMM protocol Curve have the highest return for decentralized ones.

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Bitcoin’s volatility needs to recede for its price to remain high at around current levels, according to JPMorgan strategists.

In a note published Tuesday, JPMorgan strategists led by Nikolaos Panigirtzoglou wrote that “unless bitcoin volatility subsides quickly from here,” its current price of around $50,000 “looks unsustainable.”

Bitcoin has been breaking records in recent months. It is currently trading above $51,500.

JPMorgan said bitcoin’s market capitalization has increased by about $700 billion since last September, although it has seen institutional inflows of only around $11 billion.

How is it possible? There are likely two reasons, according to the strategists. First, an increase in interest from real money investors and speculative investors. Second, significantly high retail inflows.

“Movements since January this year appear to have been more influenced by speculative flows,” said the strategists. “This also suggests that some pickup in real money flows would likely be needed to sustain current prices in the absence of a re-acceleration of the retail flow.”

As for retail inflows, they said, “the US retail impulse has been particularly strong since January and there is little doubt that this retail impulse has been a driving force not only for equities, but also for bitcoin.”

The strategists compared bitcoin’s volatility with gold’s and said that bitcoin and its biggest fund — Grayscale Bitcoin Trust (GBTC) — on average consume 6.2x more risk capital than gold and its biggest fund — GLD — the largest gold exchange-traded fund by assets under management. Risk capital refers to funds allocated to speculative activity and used for high-risk, high-return investments.

JPMorgan strategists also commented on recently launched ether (ETH) futures by CME Group and said that ETH futures’ initial slow traction is similar to what CME bitcoin futures saw in their early days.

“But in our opinion, it will likely not take as long for Ethereum futures to begin gaining traction as it initially took for Bitcoin futures, as investor interest in cryptocurrencies has had a few years to mature,” said the strategists.

© 2021 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

This month Lars Hoffmann takes takes macro look at the month of January. Ryan Todd shares insights from MicroStrategy’s historic Bitcoin Summit, and Mika Honkasalo discusses his latest research, Cosmos IBC and arguments for application-specific chains.

You can view the full recording below and can download the accompanied slides here. 

This research piece is available to
members of The Block Genesis.
You can continue reading
this Genesis research on The Block.