“A bitcoin ETP would offer convenience and security to investors who do not want to deal with the hassle of managing their own private keys or trusting third-party custodians. It would also enable financial advisers to easily allocate bitcoin to their clients’ portfolios using familiar and trusted platforms. The ETP structure itself is proven and tested… Even when products have had to delist during events like Terra and FTX, it is because there was no sourcing of the underlying asset, but the actual structure and the product itself did what it said on the tin. These conventional ETPs will allow investors to diversify their portfolios by adding assets that we believed in before many others, and that we believe are essential in successful portfolio allocation.”

In summary :

• • ETPs provide a regulated and accessible avenue for investors to gain exposure to cryptocurrencies without the complexities of direct ownership.
  • ETPs offer a strategic advantage in incorporating emerging assets like cryptocurrencies into traditional investment portfolios.
  • The robustness of ETPs as investment vehicles allows them to maintain their integrity even when underlying assets face challenges.

Exchange-traded products (ETPs) offer regulated, cost-effective access to a wide array of assets, including digital assets, for both retail and institutional investors. Since the first bitcoin tracker launched in Sweden in 2015, digital asset ETPs have grown significantly—from just 17 in 2020 to around 180 today—driven by collaborations between traditional financial institutions and crypto-native firms. ETPs, which include ETFs, ETNs, and ETCs, trade on stock exchanges and track various benchmarks or assets, with ETFs comprising the vast majority of global ETP assets. As of November 2023, there are 11,859 ETPs and 23,931 listings globally, with assets totaling $10,990 billion, 98% of which are in ETFs (ETFbook). Oliver Wyman projects ETF assets to grow at an annual rate of 13–18% from 2022 to 2027, reflecting the product’s increasing role in global investment markets (source).

Originally, digital asset ETPs started as trackers for individual digital assets. Presently, the market offers a broader spectrum of digital asset ETPs, encompassing basket, staking, inverse, and leveraged products, along with specific indices tailored to handle volatility.

Regarding underlying assets, based on recent data compiled by ETFBook and BitMEX Research, and after excluding equity and OTC-traded funds while incorporating additional data, it is observed that among 162 digital asset ETPs, bitcoin, ethereum, and basket products constitute 58%. The remaining 42% comprises a diverse array, including single digital assets from the long tail, as well as short, volatility, and leverage products.

Among the 162 products, 121 fall under the category of ETPs, while 41 are specifically classified as ETFs. This ETF category further breaks down into 16 futures ETFs and 11 pending US spot bitcoin ETFs awaiting launch. Additionally, there are 14 staking products in total, comprising thirteen ETPs and one ETF. Staking products allow investors to capitalize on the staking yield generated by their holdings.

Out of the 14 leading digital asset ETPs by assets, nine are dedicated to tracking bitcoin, constituting 64% of the total. The remaining five encompass three ethereum trackers, one solana tracker, and one Binance coin tracker. Within the set of 14 products, Switzerland hosts four (all from the issuer 21Shares), Canada hosts three, Jersey hosts two, and there is one each domiciled in Germany, the US, and Liechtenstein. Among the top 14 products by assets, four are categorized as ETFs, consisting of three spot ETFs and one futures ETF. Among the ETPs, eight are physical products, while two are classified as synthetic.

Launching new digital asset ETPs comes with various considerations and constraints. These encompass adhering to regulatory and stock exchange stipulations, obtaining necessary approvals, meeting liquidity prerequisites, gauging investor demand, and ensuring access to public price data and fiat trading pairs. Despite these challenges, ongoing product innovation persists, driven by the entry of more participants into the market. Issuers and index providers are actively seeking to secure market share and set themselves apart. Simultaneously, the growing understanding and acceptance of this asset class among regulators, service providers, and investors contribute to the evolving landscape.

ETPs impose management fees, also known as expense ratios or sponsor fees, to cover the expenses associated with managing and operating the products. These fees are typically calculated annually as a percentage of the holdings and are deducted from the Net Asset Value (NAV) either on a daily basis or at regular intervals. In the early stages of crypto ETPs, some were able to charge relatively high fees, reaching up to 2.5%, whereas the usual range for ETP fees falls between 0.05% and 0.75%. The fact that certain crypto ETPs, despite charging 2.5% when alternatives offer fees as low as 0%, have accumulated significant Assets Under Management (AUM) underscores the stickiness and the advantage of being a first mover in this space.

Moving forward, fees are expected to be a pivotal point of differentiation for new products, as exemplified by the recent developments in the US spot ETF arena. Notably, Invesco/Galaxy announced a fee waiver for the initial six months and the first $5 billion in assets, while Fidelity proposed a fee of 0.39%. As of January 8th, announcements from other issuers affirm that a competitive landscape for fees is indeed emerging (see link for reference “Race to zero and impact of Terrordome : US spot bitcoin ETF frenzy continues”).

Asset managers who overlook ETF/ETPs with the notion that they exclusively cater to passive strategies are overlooking the essence of these investment vehicles. An ETF/ETPs serves as a distribution technology applicable to various investment styles or strategies. The momentum behind ETF growth persists due to robust regulatory, demographic, and structural factors. Projections suggest that the European ETF market will expand significantly, potentially tripling to $3 trillion by 2029. It’s evident that there exists a substantial fee opportunity for asset managers to capture, maintain, or forfeit.

The drivers for such growth consist in many operational and regulatory challenges faced by regulated institutions, many in ETP can help resolve, such as:

• Off-balance sheet treatment of issued products

Non consolidated treatment of the Issuer vehicle for the Sponsor of the Product, under most reporting standards. The issuance vehicle is a Swiss limited liability company, wholly owned by a standalone Swiss charitable shareholder, under supervision of Swiss federal authorities.

We are the only option in the market to issue off-balance sheet digital asset backed ETPs, which is a requirement under many US and European consolidation requirements for financial institutions.

• Flexible Selection of counterparties

Tailorable execution platform for authorized participants and index providers.

• Choice of multiple custodians

Client acting as Product Sponsor/Asset Manager is free to make a selection of a custodian institution which will then be engaged by the issuance vehicle and onboarded with the custodian.

Within the engagement of the custodian, the client will directly discuss the terms of such engagement, preferred reporting tools and obtain viewing access to the custodian wallets/accounts controlled by the issuance vehicle and pledged in favour of the ETP noteholders.

The clients may choose to work with “a default” custodian already onboarded with the issuance vehicle or open a new custodian engagement exclusive for their products only.

• Tailored setup for active trading/rebalancing products

The rebalancing trades for ETP products tracking an index or basket of underlying components, based on index or actively managed ETPs, are done by Clients or under their control and instructions, as Product Sponsors.

• Quick time to market and efficient costs

Drafting product documentation, legal framework and getting approvals from authorities is generally the most daunting and longest tasks in launching a new ETP program, with timeframes anywhere between 9-24 months and high legal costs (approx. CHF 500,000).

Our turn-key solution offers the additional benefits of working with available standard documentation and flexible legal framework for quickest time to market for Clients (between 3-6 months, with setup fees of around CHF 70K per ISIN).

• Privately placed products ensure successful Public Listing

One of the most critical moments in the launch of ETP Product on the market is the “seed” funding.

A “weak” seed funding may hinder larger institutions investing because of risk policies prohibiting becoming a majority investor (usually, around 10% threshold ).

• NAV Reporting to exchanges/investors

We take care of all necessary investor reporting, fee calculations and NAV, etc and its dissemination to all major financial market data bases, including:

factsheets, PRIIP KIDs and MiFID2 Product Metadata in Switzerland and EU for optimum distribution.

• Fully collateralised products

ETPs are fully collateralised at all times to mitigate the issuer risk.

We maintain the highest security standards through segregation of portfolios, full collateralisation and oversight by an independent third party security agent.

• Highly regulated products

Highly regulated, all ETPs have a public prospectus, are exchange approved and fully documented