Institutional clients are pushing NYDIG and Fidelity to offer more ETH services

Bitcoin may be the top cryptocurrency by market capitalization, but demand for ether, Ethereum's native crypto asset, is growing within the institutional investment world.

This trend appears to be pushing some previously bitcoin-focused investment firms to provide their clients with support for ETH. 

The surge in demand for ether was on display in Coinbase's second-quarter earnings, with the publicly traded exchange and brokerage firm reporting that ETH trading volumes topped bitcoin volumes for the first time during that period. 

Four well-placed sources told The Block that NYDIG, the bitcoin-focused financial services firm best-known for its wide-ranging banking partnerships, has been quietly offering ETH custody to its clients. Increasingly, large hedge funds are approaching NYDIG for ETH-related services, the sources said.

"There’s the perception of not being seen as choosing the winning horse for their end customers but offering two assets that fit existing reg framework is key," one source explained.

NYDIG's ETH footprint is notable, considering the firm has become a darling among the bitcoin community for drawing in large insurance firms and banks into the market on the narrative that bitcoin can serve as an inflation hedge. The firm has struck a series of partnerships with the end goal of offering bitcoin access to bank clients.

During an episode of The Scoop podcast earlier this year, NYDIG CEO Robert Gutmann said that "100 out of 100 of the last conversations I've had with investors seriously looking to allocate...100% of those conversations have been about bitcoin."

Yet NYDIG has been far less vocal externally about its ETH-related activities. An October 2020 blog post penned by one of its investors, Fintech Collective, noted that "NYDIG supports custody for the 'crypto majors' — Bitcoin, XRP, Ether, Litecoin, and Bitcoin Cash."

A representative for NYDIG declined to comment when reached.

Fidelity Digital Assets, the crypto unit of asset management giant Fidelity, has also been feeling pressure from its clients on this front, according to two sources.

The sources said a majority of its hedge fund clients want FDAS to offer ETH custody and execution services. The firm has been looking to support ETH since 2019 but was set back by "a lot of early tech debt that was prioritized." The source expects FDAS to support ether by year-end.

Fidelity confirmed the ETH plans when reached but added that the date for support will likely fall in 2022. In an interview with Fortune, Tom Jessop, who leads FDAS, said that the firm would roll out ETH support in 2022, citing client demand.

"Yeah it flips, honestly getting a straight answer was so hard," the Fidelity source said. 

What's behind the demand?

The move into ETH by firms like NYDIG and Fidelity reflects the demand from their clients, who appear increasingly attracted to the yield opportunities in the market. 

Ethereum-based decentralized finance protocols have seen billions of capital inflows as investors look for opportunities outside of traditional finance, where yields have compressed. But that additional yield comes with additional risks. 

In an interview with The Wall Street Journal, DeFi enthusiast and billionaire Mark Cuban compared yield farming to "buying high-dividend payment stock or high-yield unsecured debt or bonds."

 “There is a reason they have to pay more than other companies. They are at greater risk.”

In any case, big investors want exposure to that space via ETH. 

That demand isn't just a Coinbase phenomenon, according to Aya Kantorovich, head of institutional sales at crypto financial-services firm FalconX. 

"It is 100% reflective of market activity — we've seen it across our desk too and in the conversations we've had with traditional asset managers and investment professionals," she said. 

The share of ETH trading volumes at FalconX increased by 10%, while bitcoin decreased by 12% during the second quarter. 

"Goldman Sachs put out a report mentioning the possibility of ETH flipping BTC," Kantorovich told The Block, adding:

"At the end of the day, institutions are looking for yield, and much of the yield in the market today exists on protocols built on top of ETH."