How ETPs will play a role in crypto’s redemption story

The next year will be one for crypto ETPs to show their potential

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When unprecedented events take place – like the collapse of FTX – it shakes up an industry. We saw the same with financial markets following Enron and the pharmaceutical space following Theranos.

But as history has shown, these incidents are the result of human fraud and missteps, rather than reflective of an entire industry. The resulting shakeout weeds out the bad players and leaves the strongest players to emerge. The remaining good players have to put their heads down, and work to rebuild trust and sentiment among consumers.

While 2022 shook up the crypto industry, crypto’s moment is not over – and it will not be.

The technology and use cases are fundamentally strong: crypto provides economic benefits globally and the value of a decentralised currency has shown its importance in emerging countries and for underrepresented populations. So how does the industry rebuild and go forward from here?

Lead with education

For consumers to become comfortable with crypto again, they first need to learn about the different crypto offerings on the market – so they can distinguish which ways are safe to enter the asset class and what actually makes certain crypto offerings trustworthy and reputable.

Crypto providers should take on the responsibility to educate clients. This means having open, ongoing conversations about product structure and whether or not products are regulated.

Clients should be encouraged to ask questions and be sceptical. It should become the norm and expectation for providers to better detail how investors’ funds are held, issue proof-of-reserves and proof of collateralisation. Companies must lean into transparency, and ensure they are answering all of these client questions truthfully.

By increasing transparency and educational resources, clients will feel more supported in the journey to re-consider crypto.

Create products that are safe and regulated

In terms of product structure, companies need to bring clients products that are simple, transparent and trustworthy. This means products that are fully regulated, collateralised, and safe. As crypto has its rebuilding moment in 2023, this will be the year where the strength of crypto exchange-traded products (ETPs) will shine through in particular.

While traditional ETFs are well-known, ETPs are actually the bigger category in which ETFs fall. ETPs operate similarly to ETFs and are held to the same standards, but are simply categorised as ETPs versus ETFs given the regulation in different regions where crypto ETPs are allowed.

Crypto ETPs have grown in popularity in recent years given their accessibility and ease of use, given they operate like other traditional financial products on the market.

Plus, entering the asset class through ETPs versus buying crypto directly offers numerous benefits including:

  • DIVERSIFICATION – ETPs allow access to an entire basket of crypto assets within a single trade.

  • EASE OF USE – ETPs are listed on regulated exchanges and traded similarly to shares. ETPs can be bought and sold through investors’ normal brokerage accounts, eliminating the need for digital wallets and allowing investors to see their crypto investments along the open-ended structure of ETPs allows them to create and redeem the ETPs at any time to ensure tight bid-offer spreads and to accommodate trades of all sizes including large transactions.

  • TRANSPARENCY – The pricing sources for the ETPs including the index values and the prices of the underlying assets tracked by ETPs are public and available to investors at all times.

  • SECURITY – ETP providers like 21Shares use multiple institutional custodians and have access to institutional-grade security arrangements for all assets it holds.

  • TAX CERTAINTY – An investor’s holding of crypto ETPs is generally subject to the same tax treatments as any other ETPs or securities they hold, this gives an investor certainty of their tax treatment compared to the still-developing world of taxation of direct crypto holdings.

Clients interested in crypto will recognise the benefits that the ETP structure offers, and we will continue to see net positive inflows into the sector.

Celebrate growth and optimism

As investors see continued growth in the industry, they will come to see that the space is not going anywhere. Launching new and innovative products to meet customer demand, and producing educational, research-forward projects – like the Global Classification Standard that 21Shares released alongside CoinGecko to provide a uniform way to classify cryptoassets – are ways to do this.

Investors will recognise that behind this growth and commitment stands strong fundamentals and innovators who are passionate about the next wave of the industry.

This year will be one of development, a year for crypto ETPs to show their potential, and a year for the industry to rebuild. There are already growth signals and this momentum will continue through regulated, safe products coupled with education and optimism. This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full issue, click here.

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