The rise of digital asset exchange-traded funds (ETFs) has been reshaping the investment landscape, offering institutional investors a new way to gain exposure to cryptocurrencies while mitigating the complexities of direct ownership.

Steve Berryman, chief business officer of Bitwise Onchain Solutions, is at the forefront of this transformation.

With a deep background in financial technology and blockchain infrastructure, Berryman shares his insights on the role of digital asset ETFs in institutional portfolios, the risks and opportunities of staking, and the future of crypto-based financial instruments.

Journey from traditional finance to blockchain innovation

Berryman’s path into the digital asset space was not a conventional one. After spending years developing risk management systems for tier-one banks, he found himself intrigued by blockchain technology in 2015.

A pivotal encounter with Ethereum co-founder Vitalik Buterin led him to leave traditional finance behind and immerse himself in the world of decentralised finance.

“I spent most of my career working as a software developer for tier 1 banks primarily building risk management systems for fixed income and derivative products,” he recalls.

“In 2015 I was looking for a new challenge and found myself attending a one-day conference on blockchain, where I got the opportunity to speak to Vitalik Buterin.  I was taken aback with his intellect and was so intrigued to understand more.”

From running his own mining rigs to consulting for blockchain firms like ConsenSys, Berryman developed a strong foundation in decentralised finance. This journey eventually led him to co-found Attestant in 2019, a company dedicated to institutional-grade Ethereum staking services. Recognising the future potential of staking-enabled ETFs, Attestant aligned with Bitwise, culminating in its acquisition in 2024.

“This new home for Attestant has positioned the business well to continue to provide staking for existing ETPs in Europe and at the same time futureproof ready to stake in the US when ETFs are enabled to do so,” Berryman explains.

Helping institutions navigate the digital asset space

Institutional investors entering the crypto market often face unique challenges, particularly in managing custody, security, and regulatory compliance.

Bitwise Onchain Solutions provides a secure and efficient infrastructure for institutions looking to stake their digital assets while maintaining full control.

“For clients that are looking for a return on their digital assets, Bitwise Onchain Solutions provides the ability to stake their digital assets using our secure infrastructure whilst always retaining full control and custody.  We offer a white glove service so clients can safely stake either through our web-portal or integrate into our API if they are larger institutional organisations,” Berryman says.

The firm’s institutional focus extends beyond just providing access; it also ensures that digital asset ETFs align with traditional investment structures, making them more accessible for fund managers operating across multiple jurisdictions.

Diversification and the institutional case for crypto ETFs

One of the primary advantages of incorporating digital asset ETFs into institutional portfolios is their potential for diversification. While cryptocurrencies have historically been volatile, Bitcoin and Ethereum have demonstrated resilience and impressive long-term performance.

“In a multi-asset portfolio construction process the fund manager’s goal is to create a well-diversified portfolio that has exposure to many asset classes and sectors to maximise the Sharpe ratio (risk reward ratio),” Berryman explains.

“This is where having a crypto asset ETF holding could add diversity to the portfolio as the correlations of this crypto asset class to other traditional asset classes, such as bonds and equities, in the portfolio are likely to be very different.”

This unique risk profile makes digital asset ETFs particularly attractive to institutional investors with a higher risk tolerance. However, as Berryman points out, even more conservative institutions will likely allocate to crypto over time to avoid the risk of being left behind.

“Although over time we will expect to generally see more institutions getting involved in the digital asset space as they realise not having an exposure to this asset class would potentially be a bigger risk in itself as their underlying clients are able to move to institutions that do offer the exposure to this asset class,” he notes.

Technical and tax considerations: why ETFs offer an advantage

One of the lesser-known advantages of digital asset ETFs is their tax efficiency. Compared to direct crypto ownership, ETFs offer a structured investment vehicle that helps investors manage tax liabilities more effectively.

“We have seen in the US and UK, income tax on directly held crypto is paid in the year it is earned and that creates a big risk for the buyer,” Berryman explains. “You could find yourself paying more tax than you earned if the prices or FX have moved against you. Funds will manage these risks and will have more tax efficient wrappers.”

Additionally, while technical risks such as custody and staking security remain key concerns, Berryman emphasises that institutional-grade staking providers mitigate many of these risks.

“Once investors are happy and understand the risk of staking, many will assess the level of risk for the level of return and could decide it is worth participating, especially if knowing that the staking is run by professional institutional grade staking companies with all the appropriate security safeguards in place,” he says.

Managing risk and navigating the regulatory landscape

Despite the growth of crypto ETFs, institutional investors must still contend with risks such as asset concentration and regulatory uncertainty. Unlike traditional ETFs, which typically hold a diversified basket of assets, digital asset ETFs often focus on a single cryptocurrency, increasing exposure to market swings.

“Typically, digital asset ETFs are currently single asset holding ETFs, which means there is concentration risk for an investor vs traditional ETFs which are usually composed of multiple holdings to reduce the concentration risk to any single holding in the fund,” Berryman explains. “However, if the digital asset ETF is held as part of a balanced multi-asset portfolio this risk can be reduced.”

Regulatory clarity will play a crucial role in further adoption. Berryman believes that while regulatory uncertainty has slowed institutional participation in the past, increased oversight will ultimately benefit the market.

“Regulations have an important role to play, as they ultimately give guidelines or clarity to asset managers as to how to manage this new asset class in a compliant fashion,” he adds.

“The digital asset space has generally been devoid of specific regulations, which has actually hindered its progression, but as the regulators focus further on this space and evolve the regulations this is likely to lead to more growth and adoption by asset managers and allocators.”

Ethereum staking and the future of digital asset ETFs

Looking ahead, Berryman predicts that institutional engagement with Ethereum staking will grow significantly as wealth managers become more familiar with its risk-reward dynamics.

“If you are generating a yield after paying management, custody, insurance, tax and staking fees then why would you prefer not to invest in a staked product?” he argues. “However, there are liquidity considerations to be taken into account and what we may well find is that traditional wealth managers actually end up keeping a mix of the staked and unstaked versions in their portfolio allocation depending on the purpose.”

As more institutional capital flows into the digital asset space, Berryman expects Bitcoin and Ethereum ETFs to dominate, with sovereign wealth funds and pension funds eventually joining the fray.

“We certainly see flows continuing to grow in the digital assets ETF space, and most funds are likely to head into Bitcoin and Ethereum ETFs, as the leading cryptocurrencies by market capitalisation. The general expectation is that funds will be significantly larger in AUM within the next 5 years as more professional investors, sovereign wealth funds, pension funds and hedge funds start to allocate capital to this space,” he notes.

“Even though we have seen very strong flows from the outset of these ETFs, this has mainly come from the traditional digital asset players, and we have yet to see the large pension funds and sovereign wealth funds come into this space in significant volumes.”

Advice for institutional investors

For institutions hesitant to enter the crypto ETF space, Berryman recommends a cautious but proactive approach.

“These digital asset ETFs are still in their infancy phase and potentially could be a good long-term investment,” he advises. “However, like any typical investment drip feeding in a small amount of capital over time is better if one is uncertain about the value or volatility of the investment.  Digital assets are extremely volatile, so not adding your entire allocation of capital in a single go, but rather spreading your allocation until you have reached your goal is generally the rule of thumb for any investment strategy.”

With Bitwise Onchain Solutions leading the charge in staking and institutional crypto adoption, Berryman remains optimistic about the role of digital asset ETFs in the broader financial ecosystem.

As traditional finance and crypto continue to converge, institutions that embrace this new asset class may find themselves well-positioned for the future.