The crypto ETP space (ETP, short for Exchange Traded Product, refers to exchange-traded products, including ETFs, ETCs, or ETNs) is one of the most exciting areas of growth and innovation in the European ETP market. As of February 2022, there were 73 exchange-traded crypto products in Europe from different issuers, with combined assets under management (or “AUM” for short) of around US$7 billion, which is more than 50% of the world’s total volume of listed crypto securities.
However, because the asset class is still relatively young, some of the structures used do not conform to the same standards that investors from the broader and traditional ETF and ETP markets are used to. The way issuers structure their products means that the risks faced by investors and market participants vary widely.
Tom Rodgers and Hanut Singh name three main points here:
- Credit agreements (the so-called “lending”)
- synthetic versus physical escrow of the assets
- collateral structures.
In the world of stock ETFs, fund managers often lend the underlying securities on a regular basis. In this way, they receive payments from borrowers and increase the return on the fund. However, the risk of counterparty default (the borrower fails to repay or defaults) is greater in crypto markets than in equity markets. This is because lending is more unsecured, fewer risk control measures are in place and the underlying collateral arrangements are far less transparent.
In addition, the benefits of lending and securities lending are often prioritized (improved liquidity, improved market efficiency, improved returns), while the additional risks are pushed into the background or lending returns do not reach the investors themselves. However, income from lending assets should be fully passed on to ETP investors, minus costs. This is accepted on the ETF market and reported as outperformance.
Above all, more transparency is needed to help investors with their investment decisions. At the same time, however, investors would have to pay close attention to the product documentation in order to be able to adequately assess the actual risks associated with the individual products. Today the DYOR principle applies more than ever: Do Your Own Research.
The entire analysis, which is currently providing exciting topics of discussion on the market and thus supports the further development of product standards, Is there … here.
ETC Group
ETC Group is Europe’s leading provider of innovative, cryptocurrency-based securities. As a young company, the ETC Group launched the world’s first central clearing Bitcoin ETP. This is listed on the Deutsche Börse XETRA. We have already presented the company and its products in our article “ETC Group: Crypto products on the stock exchange”.
ETC Group coined the term “Exchange Traded Cryptocurrencies” because their ETC products are 100% collateralized like traditional gold or oil ETCs, i.e. H. they own 100% of the assets they represent in the market.
Crucially, our products allow investors to physically redeem the crypto assets they have invested in. Investors can therefore redeem their shares as an alternative to selling them on the stock exchange and instead own the cryptocurrencies themselves. The physical redemption facility makes the products fully fungible, which is why they track the performance of the underlying assets so closely. If this were not the case, market makers would immediately spot arbitrage opportunities and price differences. Ultimately, investors can be confident that they have direct access to the underlying asset whenever they wish.
Maximilian Monteleone, co-founder and CMO of ETC Group
Get started with Exchange Traded Crypto Products today? Visit the official homepage of the ETC Group for more information.
You want to buy Polkadot (DOT)?
This is possible via eToro, among other things. eToro offers investors, from beginners to experts, a comprehensive crypto trading experience on a powerful yet easy-to-use platform. We took a close look at eToro.
To the eToro review