Exchange traded product types

Navigating the complex market for Bitcoin exchange traded products

 

Bitcoin recently turned 13, with 31 October 2021 marking the anniversary of Satoshi Nakamoto’s initial white paper outlining the concept for the cryptocurrency. 

Today, Bitcoin is entering the mainstream. For institutional investors wanting exposure to Bitcoin, the market has undoubtedly evolved enormously over the decade, or more since the seminal paper that kicked off the cryptocurrency revolution was first made public. While the upside is a much greater degree of choice for those institutional and professional investors interested in Bitcoin, the confusing range of products and options now available are muddying the waters, making the market far more challenging to navigate.

 

Types of Products

For investors looking to adopt cryptocurrencies but not prepared for the risk associated with acquiring it directly, several different products are available.

  1. Funds or closed-end trust with a fixed number of public shares, traded “over-the-counter” (OTC) through a broker
  2. Exchange-traded products (ETPs) bought through a broker or directly on an exchange

 

Even under the ETP categorisation, there is still further complexity:

  • Spot ETFs (or physically backed): Bitcoin funds that hold the physical asset
  • Futures ETFs: Derivatives-based Bitcoin futures
  • Innovator ETFs: Funds investing in global companies with crypto products
  • Exchange-Traded Notes (ETNs), often marketed as ‘ETF like’ products: types of unsecured debt securities that track an underlying index of securities
  • Exchange-Traded Commodities (ETCs): types of security that can offer traders and investors without direct access to spot or derivatives commodities markets exposure to commodities*

 

Exchange traded product variables – a deep dive into Bitcoin ETF characteristics

So what do investors need to know about these various ways of gaining exposure to Bitcoin through an ETF? There are four main areas where Bitcoin ETFs differ from ETPs:

 

Structure and Settlement

Bitcoin spot ETFs are structured to trade like any other equity-like instrument, whereas other products are made up of derivatives that can be over-leveraged, leading to significant counterparty risk. Jacobi has therefore created a Bitcoin ETF, working with Tier 1 firms, to remove multiple elements of risk or barriers to entering the market.

As an institution, there is:

  • No need to set up a Bitcoin wallet
  • No need to find and pay for a custodian
  • No need to train staff to understand how to move digital assets around
  • No need to find somebody legitimate to buy Bitcoin from

Investors will not need to worry about what price they’re getting or about purchasing an unregulated product. With a Bitcoin ETF, they are just doing what they do today, dealing with an equity-like instrument that is listed on a regulated stock market. Bitcoin ETF shareholders own units of the fund which holds the underlying cryptocurrency. ETN shareholders do not own a portion of the underlying asset and instead own unsecured debt.

Bitcoin spot ETFs are cleared through a central clearinghouse and settled into a Central Securities Depository like any other ETF. 

 

Regulation and Transparency

The Jacobi Bitcoin ETF is a regulated product; all possible trading and settlement of the ETF is done through regulated entities to keep investments secure. However, many existing exchange-traded crypto products are not regulated and have no regulatory oversight through the trading and settlement process, making them inaccessible to institutional investors.

Many investors believe that if they invest in a regulated firm’s ETP, they are protected. However, this may be a misconception since the product itself is not necessarily regulated even though the firm is. For these leveraged ETPs, underinsurance also presents a substantial systemic risk. As Investopedia explains,

“ETNs and other ETPs … are not centrally cleared and are often leveraged as debt instruments, often using borrowed capital as a funding source when investing in expanding the firm’s asset base and generating returns on risk capital”.

ETF holders are only exposed to the risk of price changes in the underlying asset whereas, ETN investors are exposed to an issuer’s credit risk.

What happens if you put your investment into a company that doesn’t have adequate insurance? What protections will you have if the business folds? Only a regulated Bitcoin ETF can offer complete protection to investors as it has no reliance on the issuer.

Transparency is a core component of our product development and market communication. Some ETN issuers, on the other hand, have been using terms like ‘engineered like an ETF’, claiming that Exchange Traded Products in Europe are more or less the same as ETFs in the USA. Those ETPs lack transparency about how they are structured. It is misleading to compare other products to ETFs and call them ‘ETF-like’ when they are not regulated and have a fundamentally different risk profile.

 

Liquidity

ETF prices, like stocks, are set in real-time, and ETF units can be traded rapidly on exchange. Other products like ETNs are often not priced in real-time. Firms can have redemption limitations making it difficult to exit investments quickly. 

With an ETF:

  • You can get in and out simply and buy and sell in real-time
  • You can better understand the investment, given its similarity to other equity-like instruments on your balance sheet
  • All of your assets and investments – digital or fiat – are managed in one place 

 

Summarising the Jacobi approach

Announced in October 2021, Jacobi Asset Management received approval to launch Europe’s first Bitcoin spot ETF. 

  • Structure: ETFs trade like any other equity-like instrument, whereas other products are made up of debt instruments that can be leveraged. This leads to significant counterparty risk. The Jacobi Bitcoin ETF cannot be leveraged and cannot use derivatives like other exchange traded products
  • Settlement: ETFs are centrally cleared and settled into a Central Securities Depository. ETNs and other ETPs are not centrally cleared and are often leveraged debt instruments
  • Regulation: The Jacobi Bitcoin ETF is a regulated product traded through regulated entities to keep investments secure. Other exchange traded crypto products are not regulated and have no regulatory restrictions through the trading process
  • Liquidity: ETF prices are set in real-time and can be traded on exchange as opposed to other types of ETPs which can be more complex and time-consuming to enter and exit

We have created a secure, safe way to gain exposure to cryptoassets investing without all the complicated technology and counterparty risk. Firms, asset managers and advisors managing funds for clients looking for crypto exposure now have an opportunity to serve the demand they have. Their clients’ funds will be safe and will be invested in a well-understood manner that’s familiar with exactly how they work today with a regulated and centrally cleared product. 

 

*Source: Product definitions sourced from Investopedia