Last month, ETC Group launched Europe’s first bitcoin ETP that calculates its net-asset value (NAV) three times a day, offering a first-of-a-kind way for European investors to track the world's most popular cryptocurrency.
Uniquely, the ETC Group Core Bitcoin ETP (BTC1) arguably allows investors to better manage risk when exposed to bitcoin by allowing authorised participants (APs) to create and redeem in the primary market three times a day.
It does this by using a “tri-NAV” valuation to calculate its price three times a day, subsequently extending liquidity across US, European, and Asian spot prices by tracking three bitcoin price benchmarks.
Institutional investors can enter and exit positions by trading over-the-counter in the primary market via APs.
Chanchal Samadder, head of product at ETC Group, said: “Investors can get out at 8am, 4pm or 10pm London time [in the primary market].
“We do not think it is something that investors will use every day, but it is an option.”
On BTC1’s liquidity benefits, Samadder said: “Extended trading beyond standard exchange hours means that BTC1 helps investors access deeper liquidity in the primary market.
“Primary market liquidity is the underlying liquidity of the underlying asset class and we wanted to bring as much of that liquidity as possible into our products.
“Since there is no market convention of when bitcoin closes, we thought it makes sense to use three points of liquidity.”
A solution to lack of market makers in European crypto ETPs?
In light of the concerns over a lack of market makers for crypto ETPs in Europe, Samadder noted the new bitcoin ETP does not solve the lack of APs and market makers.
“As an industry, we would love more APs and market makers in this space," he continued. “More APs and market makers would help with secondary market liquidity specifically and would give investors more choice alongside increasing competition in terms of on-screen spreads because they are all competing for business.
“Where BTC1 does help, is bringing in the extended liquidity in the primary market for investors.”
The first ‘tri-NAV’ ETP of many?
Samadder explained the “tri-NAV” feature is a great way to capture the full benefits of bitcoin trading 24/7 versus other asset classes.
For example, an Indian equity ETF can be bought in the afternoon by European investors despite markets being closed in India.
In the case of such ETFs, the wrapper has enabled investors to access the underlying when the underlying is closed.
However, as the crypto market is open 24/7, Samadder said it is the first time where ETPs are playing “catch up to the underlying”.
Given the asset class’s structural uniqueness, introducing a product that can track bitcoin’s price across a broader time frame – 14 hours versus eight hours for standard ETPs and ETFs – seems like a natural path of product development for bitcoin ETPs.
However, the “tri-NAV” feature is confined to a single asset class.
Samadder explained the market will not see fixed income or equity ETFs that have three NAVs, as the underlying markets have a close, creating a natural single valuation point, as opposed to trading 24/7 like bitcoin.
At an institutional level, Samadder added other iterations of this product could take the form of an ethereum ETP that tracks the price across three time zones.
“Demand for [ethereum] is lower than bitcoin generally. If we see the approvals for ethereum ETFs in the US, this should subsequently drive institutional investor demand.”
