What Are Crypto Exchange Traded Products?

While exchange traded products (ETPs) have existed for 30 years, the financial crisis of 2008 and subsequent demand for increased transparency caught the attention of many investors. 

As a result, according to ETFGI, global assets invested in ETPs increased to more than $6.35 trillion by the beginning of 2020. Exchange traded funds (ETFs) account for 97% of this figure. At the end of 2019, the global industry tallied close to 8,000 ETFs and ETPs, with more than 15,500 listings from over 400 providers on 70 exchanges in 58 countries. 

It’s a big business, and investors should understand the distinctions between ETPs and ETFs. 

How do ETPs and ETFs differ?

Exchange Traded Products track underlying securities, an index, or other financial instruments. They trade on exchanges, just like stocks, so their prices can fluctuate throughout the day. 

Their prices derive from the underlying investments on which they are based. Prices are benchmarked to almost any type of investment, such as commodities, currencies, stocks, or bonds. ETPs can include as many underlying investments as the creator wishes. ETPs will also gain or lose value in sync with the underlying assets. 

The most popular type of  ETP is the ETF, which is similar to a mutual fund. ETFs typically track an underlying index (e.g., the S&P 500) or are linked to an industry, commodity, or currency. ETFs have traditionally been a cost-effective way to gain exposure to a desired market. They are passively managed and thus carry lower fees.

ETP regulation in the European Union

In 2007, the Markets in Financial Instruments Directive (MiFID) was enacted to increase transparency in European Union financial markets and standardize the regulatory framework across European markets. 

The original legislation did not include ETPs. However, MiFID II corrected this omission in 2018. Among other provisions, it extended regulation to these securities. Now, all trades are to be reported. The regulation increases transparency by requiring all investors, including those transacting in over-the-counter (OTC) markets, to report trade information.  

Increased transparency fosters increased liquidity, and MiFID II has had a positive impact on ETP investment in Europe. ETFGI, a leading independent ETF and ETP research firm, reported that European ETF/ETP assets had reached $1 trillion at the end of 2019. 

Cryptocurrency joins the ETP product lineup

Some view cryptocurrency as a high-risk asset – unregulated and rife with potential for fraud. However,  while cryptocurrency and blockchain technology are gaining respectability with institutional investors, the market’s extreme volatility still makes investing in individual cryptocurrencies too risky for many investors. But cryptocurrencies offer a significant diversification benefit. They have no exposure to the factors that drive stock market and macroeconomic performance. 

Enter ETPs. These securities offer exposure to the cryptocurrency market without the concerns of custody or owning the underlying asset. By investing through an ETP, investors can benefit from institutional-class custody, simplified trading through a standard brokerage account, greater liquidity, and transparent trading. 

Cryptocurrency Exchange Traded Products invest in the most popular cryptocurrencies, typically Bitcoin (BTC), Ripple (XRP), Ethereum (ETH), Bitcoin Cash (BCH), and Litecoin (LTC). The ETPs are physically backed, meaning settlement is in the underlying asset, rather than a cash equivalent. Like gold ETPs, investors are entitled to the underlying cryptocurrency. 

The European Securities and Market Authority, which governs all securities transactions in the EU, regulates cryptocurrency ETPs. Securities may also be subject to local exchange requirements. For example, Swiss financial products are subject to the Swiss Stock Exchange (SIX) rules. And, Switzerland is placing significant emphasis on becoming the global capital for cryptocurrency. 

The risk/return tradeoff

Cryptocurrency is one of the most volatile asset classes. Research indicates that investor sentiment drives performance in the cryptocurrency market, leading to high volatility. For example, take the case of Statista’s Bitcoin index, which averages Bitcoin prices across leading global exchanges. In December 2017, the index touched a high around $13,900. A year later, the price dropped to approximately  $3,700. By July 2019, the price recovered to about $9,500, but it sank to less than $200 in April 2020. 

In addition to the risk of significant price fluctuations, direct investors face operational concerns of storing cryptocurrency assets safely. Investors who are less technically inclined can face even greater risk. Investors deterred by the risk that accompanies direct cryptocurrency investment may find an ETP a more comfortable way to gain exposure to this market. 

The benefit of active management

While the majority of products available in the cryptocurrency space are based on a single or underlying basket of indexed crypto-assets, Swiss investment management firm FiCAS focuses on actively managing its investments in cryptocurrency. 

FiCAS CEO and portfolio manager Ali Mizani Oskui looks at market fundamentals, crypto market sentiment, and quantitative trading patterns to achieve better-than-market performance. From October 2015 to January 2018, he more than doubled the number of Bitcoin in the portfolio. The chart below illustrates the portfolio’s audited results. 

Private Fund of FiCAS’ founder (OCT 2015 – OCT 2018)

Private Fund of FiCAS' founder (OCT 2015 - OCT 2018)

FiCAS Actively Managed Cryptocurrencies Performance (Jan 2020 – Aug 2020)

FiCAS Actively Managed Cryptocurrencies Performance (Jan 2020 - Aug 2020)

One of the principal strengths of this investment strategy is its focus on boosting the number of Bitcoins in the portfolio, rather than depending solely on increasing value. Passive approaches leave investors shackled to market price dynamics, while FiCAS’ strategy demonstrates that active management can add value for investors. 

As with any security, investors must conduct careful due diligence. This is even more critical when considering an investment in high-risk assets like cryptocurrencies. When choosing a crypto ETP provider, experience and track record are key elements to consider, and investors should carefully weigh the benefits of active management.

FiCAS’ Actively Managed Certificate (ACM) solution combines the funds of several clients and allows FiCAS to manage the funds in a more efficient, effective and cost-saving manner. Thanks to an AMC, even small investment amounts can benefit from the same advantages that only large investors could traditionally enjoy. Both qualified and non-qualified investors can begin investing by buying at least 1 ETP unit.  Non-qualified investors can purchase ETP products through their bank or broker. 

For more information about investing in cryptocurrency ETPs, please visit here.

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