Cryptocurrency exchange-traded products (ETPs) have captured the imagination of investors over the past year with assets surging to record levels amid the meteoric rise of the rapidly developing asset class.
In 2020, the crypto ETP market exploded increasing more than four-fold to a record $3.1bn by the end of the year, according to data from TrackInsight. The surge has continued unabated this year with assets growing to a fresh record of $4.4bn.
Much of this has been driven by the success of bitcoin, fuelled by a continued public embrace of cryptocurrencies by large institutions such as BlackRock, as well as endorsement from Tesla co-founder and CEO Elon Musk.
Earlier in February, Tesla disclosed in an SEC filing that it had bought $1.5bn of bitcoin, sending the price of the cryptocurrency to a fresh all-time high of $44,795 on 8 February. Some sell-side analysts believe there is plenty more room for growth with Citi predicting the price of bitcoin could soar as high as $300,000 by the end of the year.
Crypto ETPs have benefitted from the dramatic rise with the BTCetc Bitcoin Exchange Traded Cryptocurrency (BTCE) seeing its assets under management (AUM) more than double in December to $352m, and by 11 February nearly doubling again to $636m.
Meanwhile, more ETF issuers have entered the market in recent months in a bid to capture the growing demand with VanEck the latest to list its VanEck Vectors Bitcoin ETN (VBTC) on Deutsche Boerse.
In the build-up to ETF Stream’s webinar on crypto ETPs on 17 February, Anna Fedorova assesses whether ETPs are the perfect vehicle for investors to access the asset class.
Crypto ETP boom
The number of ETPs offering access to bitcoin or other cryptocurrencies has been growing steadily over the last five years. According to TrackInsight, the number of listed products available to European investors has gone from zero in 2014 to 17 today with 2019 seeing a particular boom as nine new products were brought to market. 21Shares offers the most extensive range with 12 crypto ETPs listed across European exchanges.
Ankush Jain, co-manager of the Aaro DLT Multifund, a fund of funds investing in cryptoassets, noted the SIX Swiss Exchange has been particularly instrumental in driving the growth of crypto ETPs.
“The turnover of all crypto ETPs on the SIX Swiss Exchange has grown from £425m in 2017 to £890m in 2020 while the number of trades have jumped from about 20,000 in 2017 to nearly 50,000 in 2020.”
There are a number of advantages to using ETPs for exposure to alternative assets, such as digital currencies, he said, including the fact they are “listed, regulated, liquid, available to retail investors, and don’t present issuer risk due to their collateralised nature”.
He added that the “low minimums and ease of subscriptions (without lengthy paperwork) and increased liquidity also presents advantages when it comes to effective portfolio management”.
Townsend Lansing, head of product at CoinShares, pointed out that ETPs provide investors with access to cryptocurrencies via a traditional investment infrastructure, which “allows investors to focus primarily on the market risk of the asset because it gives them comfort the ETP structure is managing the so-called ‘non-investment’ risks of these assets”.
Anaelle Ubaldino, head of quant advisory at Koris International, said the recent fraud scandals around crypto exchanges highlight the advantage of using the ETP wrapper over investing directly through cryptocurrency exchanges, many of which are unregulated.
She added that since ETPs trade on regulated exchanges, “investors can trade with greater confidence knowing that all market participants have been checked and that their trades are monitored, to prevent market abuse or funding illegal activities”.
However, ETPs are not without their limitations, many of which come down to the risk attached to cryptocurrencies themselves: a relatively young and volatile area of the market.
“These hot and trendy assets trade more on speculation as opposed to a real value denominator, which has so far resulted in high volatility and large price swings,” said Ubaldino, adding that investors must be comfortable with this volatility before choosing to invest.
She also noted that like any other investment product, ETPs have their own layer of fees which investors would not incur if they chose to access cryptoassets via a direct investment. Due to the specialised nature of these funds, these fees can be relatively high, with TERs ranging from 1.49% to 2% per annum, which “will hinder investor returns over the long-run”, Ubaldino said.
When it comes to volatility, Jain believes actively-managed crypto ETPs could be the answer to mitigating these risks as they offer better downside protection. However, this area of the market is still nascent, with just one actively managed product available to investors in Europe; the 15 FiCAS Active Crypto ETP.
Launched on the Six Swiss Exchange in July 2020 by Bitcoin Capital and managed by FiCAS, it invests in the top 15 cryptocurrencies using active trading and risk management. The 15 FiCAS Active Crypto ETP has returned 107% over one year to 11 February, according to TrackInsight, but flows have been relatively muted to far, with assets sitting at just €7m.
For UK-based investors, the pressure is also mounting from the regulatory side, as the Financial Conduct Authority (FCA) has recently banned the sale of crypto ETNs to retail investors on concerns around the risks they pose, including volatility and market abuse.
However, this is not the case across Europe, Lansing stressed.
For instance, he pointed to the European proposals for a Market in Crypto-assets (MiCA) which aims to provide a single licensing regime across all member states by 2024.
“We expect investor adoption of bitcoin as an asset class to increase alongside the adoption of transparent and comprehensive regulatory regimes that treat digital assets in a similar fashion to more traditional asset classes,” he said.
In addition, there is a push for transparency from product issuers themselves which gives rise to hopes for a more mature market in digital currencies. Lansing said it is his firm’s goal “to bring transparency and trust to digital asset investing and to use the unique attributes of bitcoin and digital assets to do this”
He pointed to the launch of an attestation service by CoinShares in September 2020 in partnership with global accounting firm Armanino, whose aim it is to “provide public and open visibility into reserves, combined with on-demand attest reporting, creating a new standard of transparency and trust for the digital asset industry”.
As with any emerging industry, the trick is finding a balance between reaping the benefits of innovation while mitigating the risks for investors. But with demand for cryptoassets at record highs, ETP providers have no choice but to respond or be left behind.