But now, thanks to ETF innovations, getting into crypto is easier than ever.
There are two main companies that offer crypto currency trackers: Sweden’s XBT Provider and Switzerland’s Amun. Both provide bitcoin and ether trackers that trade on exchange. But both go about it in very different ways.
XBT is the older and bigger brand, and they have done a lot for crypto. They were the first to provide a crypto tracking product on a regulated exchange. Their products are the largest crypto ETPs on the market and trade on tight spreads.
As for how their products work, well, they are plain old derivatives. When you buy one of their bitcoin or ether trackers, what you are buying is a certificate from XBT that says they will give you the value of bitcoin or ether in euros or Swedish krona.
They use a structure that is one of the riskiest – as far as counterparty risk goes – that I have seen in the European ETF market.
If you buy one of XBT’s bitcoin certificates, you do not legally own any underlying asset. Nor are you a creditor. All you have is XBT’s promise that they can back up their certificate to the tune of whatever price bitcoin is trading at.
XBT say they run a hedge fund that is always buying enough bitcoin to back the total AUM value of their bitcoin certificates. And I believe them – they probably are. But legally speaking, investors do not have any recourse to those bitcoins that the hedge fund holds. Meaning exposure to bitcoin remains entirely synthetic.
As an additional measure, XBT also guarantees their certificates. But the guarantee comes from an entirely separate company based in Jersey. XBT do not say if they have $100 million in cash or liquid securities in the Jersey company – which would be enough to guarantee all their outstanding AUM value for their bitcoin certificates. One doubts that they have this much however.
The second company is Amun.
Amun provides three crypto ETPs: a bitcoin, ether tracker as well as a basket of cryptos.
Amun are a newer company but they go about providing crypto trackers in a very different way. Amun’s products are debts that entitle you to crypto. Unlike XBT’s, their products are physically backed and imply legal ownership of the underlying crypto currency.
How do they do this?
Switzerland – like most countries operating under Roman law – does not really have trusts in the way that we Anglo-Saxons do. (Most physical ETFs are structured as trust instruments). So what Amun uses is a special purpose vehicle that issues non-interest bearing debts, that have the crypto currency as collateral. So you have a direct claim to whatever crypto as a creditor.
Create and redeems for Amun’s products can be a bit technical. For a start, the portfolio composition files are published in crypto. They do not give dollar values anywhere, as almost every other PCF does.
The way market makers then user these PCFs to deliver coin is also tricky. It involves market makers delivering physical coin to a separate account called a “transactional wallets”, which are part of Amun’s security pool but separated for security purposes.
The physical coins are then held in cold storage on computers that have zero internet access. They are held with an SEC registered custodian.
The first thing I always look for when picking ETFs is fees. (Remember Jack Bogle’s advice: the magic of compound interest is too often undermined by the dark magic of compounding costs).
Yet here there isn’t too much difference between the products. They charge 2.50% a year. (This may sound expensive, but both Amun and XBT are cheaper than buying and selling through CoinBase however).
But in all I think I prefer Amun’s structure as I like that there is a legal claim on physical cryptocurrency.