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Crypto ETF vs ETP: What’s the difference?

01No need to search for a Crypto ETFchevron02What is UCITS and why does it matter?chevron03US vs Europe: Regulatory Varianceschevron04Drawing Parallels with Goldchevron05Expanding Asset Coveragechevron06Conclusionchevron

Cryptocurrencies have gained significant attention from investors in recent years, with many seeking exposure to this emerging asset class. In the realm of traditional finance, exchange-traded products (ETPs) have become a popular vehicle for accessing various investment opportunities. 

Investors will likely encounter two terms: crypto ETFs (exchange traded funds) and crypto ETPs (exchange traded products). While they mean similar things, there are crucial distinctions between the two. This article aims to shed light on the differences between crypto ETF and ETP and explain why crypto ETPs have gained prominence in Europe.

ETF stands for Exchange Traded Fund. In the United States, “ETF” has become the default term for all exchange-traded products that aim to replicate the performance of an underlying asset or benchmark. The most popular is the SPDR S&P 500 ETF (SPY) with over 370bn USD of assets under management as of 1st June 2023. 

However, in Europe, due to specific fund regulations, the term "ETF" cannot be used for single assets like bitcoin, gold, or smaller baskets of assets. This regulatory distinction means that when European investors search for a "crypto ETF," they should be searching for a "crypto ETP” instead. 

UCITS (Undertakings for the Collective Investment of Transferable Securities) regulations play a significant role in shaping the investment landscape in Europe and provide a framework for the creation and operation of investment funds within the European Union. Whilst this framework offers many benefits in terms of investor protection and harmonisation across countries, it also imposes certain limitations that prevent the launch of crypto ETFs in Europe.

Regardless of their structure, all ETPs share a common goal of replicating the performance of an underlying asset, benchmark, or investment strategy. The specific type of ETP (i.e. whether it is structured as a fund or a debt security) depends on the nature of the underlying asset or benchmark it aims to track. For more information on this topic, check out our article

Both ETFs and ETFs are part of the larger ETP product family

One of the primary reasons behind the divergence in structure between crypto ETFs and ETPs can be attributed to regulatory differences, particularly in the United States and Europe. 

In the US, the Securities and Exchange Commission (SEC) has been reluctant to approve a physically-backed crypto ETF. As a result, close-ended investment trust structures such as the Grayscale Bitcoin Trust (GBTC) or ETFs backed by derivatives have emerged as alternatives.

In contrast, Europe has found a solution to this regulatory challenge. Crypto ETPs have existed in Europe for several years and have gained traction among investors. These ETPs are structured as debt securities rather than funds, because UCITS regulations prohibit the launch of funds that are based on a single or very few components.

For European investors seeking an ETF-like exposure to cryptocurrencies, the search ends with Crypto ETPs. Crypto ETPs have existed in Europe for several years and have gained considerable traction among investors. They can comfortably sit alongside equities, bonds, and funds in an investor's portfolio, requiring no additional on-boarding process or technical know-how.

The narrative of cryptocurrency ETPs and ETFs shares an uncanny resemblance with that of gold. In the United States, gold ETFs have gained considerable popularity, while in Europe, ETPs are the preferred investment vehicle for gold exposure. The structure of physical gold ETPs in Europe mirrors that of crypto ETPs.

In the case of physical gold ETPs, each share entitles the investor to a specific amount of the precious metal, securely stored in a vault at a secret location managed by an independent custodian, often a large bank. Crypto ETPs achieve a similar outcome, where each share entitles the investor to a specific amount of cryptocurrency. These digital assets are securely held by an independent specialist crypto custodian, typically utilising "cold storage"—a non-internet connected storage method—for enhanced security.

Another advantage of crypto ETPs in Europe is the broad range of underlying assets or tokens available. While the focus has primarily been on popular cryptocurrencies like Bitcoin and Ethereum, crypto ETPs enable investors to gain exposure to a variety of other tokens as well. 

For example, CoinShares’ ETP offering now covers 13 individual cryptocurrencies, some of which even include additional staking rewards within the Coin Entitlement of the product. 

There are also smaller baskets of crypto available via the ETP vehicle. Crypto Index ETPs often include features such as automatic rebalancing, and are designed to provide exposure to a broader range of digital assets in a single trade. For more information, check out our dedicated article here. 

For investors in Europe seeking exposure to cryptocurrencies, it is important to note that the term "crypto ETF" is not the appropriate search criterion. Instead, investors looking for the benefits and features typically associated with a "crypto ETF" should focus their attention on "crypto ETPs." 

These ETPs can seamlessly complement existing holdings of equities, bonds, and traditional funds without requiring additional onboarding or technical expertise. By mirroring the structure of physical gold ETPs, crypto ETPs ensure secure storage of digital assets while offering investors the potential for long-term growth in the rapidly evolving world of cryptocurrencies. 

To delve deeper into the nuances of selecting the right ETP, consider reading our comprehensive guide.