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Why Invest in Crypto through ETPs?

01Exchange Traded Products: a Simple Definitionchevron02Why Gain Exposure to Crypto through ETPs?chevron03What about the riskschevron04ETPs combine institutional finance’s reliability with crypto’s dynamicschevron

Exchange traded products (ETP) are already popular products in the investment world, with a market size of over US$9.2 trillion as of December 2022. But did you know ETPs can also be used to invest in crypto? In Europe only, US$4.1bn are managed through crypto ETPs - and the numbers keep growing. That’s because crypto ETPs are a transparent, regulated and easy-to-access option to gain exposure to digital assets.

 

Evolution of ETPs market

ETPs are listed securities that trade on an exchange, and aim to track the performance of an underlying asset. This could be a basket of equities, a commodity like gold, or any other type of investment asset - including crypto. They are not a new product, and their popularity has been rising steadily through the past 25 years. Head over to our article What are Crypto ETPs for a detailed analysis. 

There are several key elements that make crypto ETPs appealing to investors, especially those relatively new to crypto or looking for a straightforward addition to their existing portfolios. We’ll cover the five major crypto ETP benefits just below.

The world of crypto can feel daunting to navigate, but ETPs take away a big part of that complexity. Instead of surfing on non-regulated or under-regulated crypto exchanges or paying high fees for legacy funds dabbling in crypto, investors can buy ETPs via their traditional bank, broker or investment platform during market trading hours in the same way they would buy stocks and shares. The ETP then sits alongside all the other investments in their portfolio in a single account, where it’s easier to analyse and compare products. And even though brokers will generally not offer investment advice, they typically offer a higher level of customer support compared to crypto exchanges.

 

Crypto ETPs embed in your existing portfolio

 

Another key feature of ETPs is their built-in safety and transparency. ETPs in Europe are subject to various financial regulations as well as the listing rules of regulated traditional exchanges. They therefore follow strict accounting, disclosure and transparency rules, as established by European regulators. Following recent high-profile scandals surrounding unregulated exchanges, this provides a welcome level of safety.

Most physically-backed crypto ETPs are structured to protect the assets held by the issuer in the case of a bankruptcy or default event, meaning the investors’ exposure is limited to the underlying asset. 

There are several key players in the structure of a physically-backed ETP that who make this possible:

  • Issuer : A legal entity, or special purpose vehicle (SPV) specifically created to issue ETPs

  • Trustee: Independent and acts on behalf of security holders. It approves all withdrawals of the underlying asset (e.g. bitcoin) held by the Custodian. The Trustee also holds all rights and entitlement to the crypto on trust for ETP holders. 

  • Custodian: Usually a specialist digital asset custodian where the crypto backing the ETPs is securely held. New shares of ETPs cannot be created without the corresponding amount of crypto being delivered to the custodian first.

For example, if the custodian were to go bankrupt, the Issuer (with the consent of the Trustee) would have a right to reclaim the crypto from the Custodian’s administrator or liquidator.

If the Issuer were to go bankrupt, the independent Trustee would take control of the Issuer's assets on behalf of ETP holders.

In the event that the ETP provider itself were to go bankrupt, there should be no impact on the assets of the Issuer as these are ring-fenced from any other assets, and are held by the Issuer for the benefit of ETP holders.

Ultimately, because the risk of bankruptcy is removed, there is no credit risk, which is one of the reasons why the physically-backed structure has become the preferred approach for product providers like CoinShares

Some crypto ETPs go a step further, and ensure that the legal protection extends to each individual ETP. For example, CoinShares Physical ETPs do not allow commingling of assets between products, ensuring investors' exposure is limited to the asset underlying the ETP. 

 

Physical ETPs are regulated

Of course, ETPs also share some drawbacks with standard investment vehicles: 

  • No round-the-clock trading: they are only available during regular market hours.

  • Holding fees: the product provider usually keeps a small share to compensate for the cost of securely maintaining the asset, in the form of a management fee. 

  • Risk: Investment always comes with risk, and the underlying asset’s value might fluctuate, leading to capital loss.

 

Investing in crypto ETPs can be considered as “complex” and carries financial risks such as high volatility and large drawdowns in value. The prices of cryptocurrencies can fluctuate rapidly, leading to significant losses in a short period of time. It's always important to carefully consider the financial risks, by reading the Key Information Document and the Prospectus, and have a well-diversified long-term investment portfolio before investing in crypto ETPs.

 

 

Why invest in crypto through ETPs ?

Crypto ETPs bridge the gap between investors lacking crypto know-how and/or requiring a higher level of security, and crypto-investment. By being easily accessible through brokers, structurally built to limit risk to their underlying asset, and as easy to trade as any share, they could be one of the best ways to invest in crypto. 

Interested in adding crypto ETPs to your portfolio?  You can check CoinShares current ETP offering, fees and prices on our website.