It also works without your own wallet

Despite wild price fluctuations and regular reports of hacks and exploits, the number of crypto investors is steadily increasing. The statistics prove this impressively. However, the technical hurdles and risks associated with unregulated trading platforms make it difficult for private investors to get started. In addition, many professional investors have no access to these trading venues. However, with crypto ETPs you can trade Bitcoin & Co. on regulated exchanges. These securities are also very easy to manage – like ETFs conveniently via a securities account. The advantage is obvious: Wallet and the necessary access to a crypto trading platform are no longer needed. There are no technical hurdles and there is no risk of assets being lost through password loss or hacker attacks.

The first crypto-ETPs hit the market in Europe already in 2015, and the first ETP that is physically backed entirely with cryptocurrency has existed since 2019. The crypto-ETPs map the value of the supported cryptocurrency very precisely. As with ETFs, this is secured by market makers. The development in exchange trading therefore hardly deviates from the underlying.

The range is diverse, the differences are in the details

There are now a number of ETCs – that is, Exchange Traded Cryptocurrencies – from various providers on the market. Around 3.6 billion euros are currently invested in the nearly 100 products. The products focus on the 20 most important cryptocurrencies. If you want to invest outside this universe, you have to rely on wallets.

An important point of difference between the individual products is, among other things, liquidity. Naturally, ETCs on Bitcoin and Ethereum attract most investors. The largest and most liquid ETC – ETC Group Physical Bitcoin (“BTCE”) – trades as liquid as a DAX stock. Although crypto-ETPs are legally considered bonds, issuer risk is minimized due to the physical deposit.

Eleven Bitcoin ETCs can be traded on Xetra alone. All are the same in terms of the basic structure, the differences are in the details: only four of the ETP providers (Bitpanda, Coinshares, ETC Group, Iconic) offer a delivery option and therefore correspond to physical possession for tax purposes. Bitpanda, ETC Group and Iconic ETPs have been approved with a German securities prospectus. This can be recognized by the ISIN, which begins with “DE”. The ETC group is the only issuer that has a separate trustee involved in the management of the crypto-assets, who oversees all transactions and inventories. Corresponding information can be found in the issue prospectuses. There you can also read that there is currently only one provider (21shares) that lends shares from the assets to earn extra money against a high risk.

Another important difference to direct investment via crypto platforms is that trading is limited to the opening hours of the exchange. This service is not free either: issuers of crypto-ETPs charge fees (TER) of between 0.21% and 2.5% pa

With some ETP providers, the cryptos can be delivered to a private wallet if desired. This puts them on a par with “physical” ownership: the income is tax-free after one year of holding – similar to physically held gold ETFs with a delivery option.

How do the cryptos enter the ETP?

So far, investors have faced the biggest risks when transferring cryptocurrencies. This is where market makers come in: they supply tokens to the ETP and receive the ETP securities in return – once a day. Or vice versa when shares are returned. The market maker then executes all transactions during ongoing exchange trading on its own. On the issuer’s side, a depository stores access to tokens in offline storage (cold storage), which is usually only available with multiple authorized signers. For this reason, and because market makers are regulated securities dealers, the transfer is very safe in comparison.

About Jan Altman

Jan Altmann is Director Investment Strategy at ETC Group. He is one of the pioneers of the ETF market in Germany and is a recognized expert for Exchange Traded Products (ETPs).

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