Coinbase announces that the ‘second wave’ of institutional investment in cryptocurrency has arrived, focusing on yield.

Brett Tejpaul, Coinbase’s head of institutional, indicates that the priorities of institutional investors in the cryptocurrency space are changing, with a growing focus on yield generation.

(Michael M. Santiago/Getty Images)

Key points:

• Institutional investors are transitioning from merely speculating on price in crypto to implementing strategies that provide consistent income from the assets they already possess.
• Innovative offerings like Coinbase’s tokenized Bitcoin Yield Fund and BlackRock’s staked-ether ETF illustrate the increasing interest in yield-generating, onchain products similar to traditional cash and bond approaches.
• With the rising interest in stablecoins, tokenization, and 24/7 near-instant settlement, large financial institutions are investigating how blockchain technology can reduce costs, expedite cross-border transactions, and enhance capital efficiency.

Institutional investors are moving beyond a ‘number go up’ approach to crypto, now focusing on identifying reliable income sources.

Numerous institutions currently hold bitcoin BTC$70,945.00 and ether (ETH) in their portfolios. While these assets are maintained for potential long-term appreciation, investors are increasingly looking to utilize them for income generation as they wait, Tejpaul stated in an interview with CoinDesk, highlighting the emergence of the next phase of institutional investment in the digital asset market.

“The second wave of institutions… is underway. It’s happening.”

This transformation is driving the development of new products, he noted. Last week, Coinbase introduced a tokenized share class of its Bitcoin Yield Fund on Base in collaboration with Apex Group, a fund services provider managing $3.5 trillion. The fund seeks to generate returns through methods such as selling call options or lending bitcoin, targeting mid-single-digit returns based on market circumstances.

The drive for yield extends beyond crypto-focused companies.

BlackRock, the largest asset manager globally, is also pursuing this direction. The firm has recently rolled out the iShares Staked Ethereum Trust ETF (ETHB), which offers investors access to rewards from supporting network security. This initiative indicates that the demand for yield-generating crypto strategies is permeating traditional finance.

This approach mirrors what traditional investors refer to as ‘structured products.’ These financial tools encompass assets with options designed to yield specific returns or profits. With numerous options and yield-generating strategies now present in the digital assets sector, traditional investors are interested in similar offerings in crypto, especially as regulators provide clearer guidelines for the industry.

Read more: Regulation, derivatives helping drive TradFi institutions into crypto

Accelerating transactions

This “second wave” of institutional investment is also concentrating on leveraging blockchain technology for payments, settlements, cost efficiency, and transparency.

The framework reflects a wider trend: tokenization. By placing fund shares onchain, asset managers can simplify ownership tracking and transfer while facilitating continuous market access. For institutions accustomed to lengthy settlement times, this practicality is appealing.

Tejpaul mentioned that nearly half of current discussions with institutions involve stablecoins and tokenization, indicating a rise in interest following recent regulatory developments in the U.S. Major financial firms are looking into how blockchain solutions can expedite transactions and reduce expenses, particularly in cross-border contexts.

This interest is gaining traction as policymakers work towards establishing clearer regulations. The approval of the GENIUS Act has already created a framework for stablecoins, while the anticipated CLARITY Act is set to further clarify the issuance and trading of digital assets and tokenized products. Collectively, these measures are instilling greater confidence in institutions to allocate capital and develop blockchain-linked products.

The advantages are clear. Tokenization enables traditional assets like bonds, funds, and private credit to be represented onchain, allowing for faster transfers and quicker settlement. Stablecoins, typically pegged to fiat currencies, provide a means to transfer value globally at minimal cost without depending on traditional payment systems.

Some of the largest entities in traditional finance are already pursuing this path. BlackRock has unveiled a tokenized Treasury fund, while JPMorgan has experimented with tokenized deposits and blockchain-based transactions. Franklin Templeton has also transitioned tokenized money market funds onto the blockchain, indicating increasing comfort with the model among asset managers.

Consequently, both traditional financial institutions and crypto-focused companies are competing to develop or integrate stablecoin infrastructure, viewing it as a cornerstone for the next evolution of financial markets.

This is directly related to what Tejpaul described as the ‘second wave’ of institutional investment entering the crypto space. The initial wave of institutional capital came from hedge funds, endowments, and affluent investors seeking exposure or arbitrage opportunities. However, this subsequent group appears distinct, comprising banks and payments companies constructing products on crypto frameworks.

This transition is closely linked to yield. Stablecoins, often backed by short-term government obligations, can generate income streams akin to traditional cash management products. Tokenized funds broaden this concept to a larger array of assets.

Simultaneously, institutions are increasingly scrutinizing market structures. Continuous trading and near-instant settlement are becoming integral to the proposition, with the two largest U.S. stock exchanges, the New York Stock Exchange and Nasdaq, poised to offer 24/7 trading to their clients. In conventional markets, trade settlements may take several days, tying up capital and exposing it to counterparty risk.

Blockchain-based systems strive to minimize this friction, thereby enhancing transparency and reducing costs.

“People want to know where their capital is at all times, and they don’t want it to be in transit or lost in the settlement process,” Tejpaul remarked.

Nonetheless, adoption remains inconsistent.

The majority of institutional capital continues to be concentrated in a small selection of prominent tokens, with limited interest in smaller assets following recent market turbulence. Additionally, large firms typically adopt new technologies at a slow pace, often requiring years to assess them.

However, the trajectory is becoming more evident. Institutions are not solely inquiring about how to acquire cryptocurrency. They are exploring what it can contribute to their portfolios and businesses. With more regulations expected to clarify this landscape, it is likely to pave the way for increased institutional capital in the future.

“All of a sudden, all the dots are connecting… what was opaque is becoming clear,” Tejpaul stated.