11 min readWith over ten years’ experience, CoinShares is one of the leading providers of digital asset investment products. Having started as an energy commodity business, the company pivoted to crypto in 2013 and issued the world’s first bitcoin exchange-traded product (ETP) in 2015. It has since expanded its range by launching physical ETPs tracking the top cryptos by market capitalisation alongside innovative offerings including exposure to staking rewards and in-house crypto indices.
This article explores why ETPs are a popular way for investors to access crypto and introduces the CoinShares product range.
Introducing ETPs
ETPs provide exposure to an underlying asset such as a market index or an individual investment. They were originally designed to give investors access to an entire index, like the S&P 500, but they have since expanded their coverage to a variety of assets, including bitcoin and ether. Assets Under Management (AUM) in ETPs surpassed $10 trillion this year, and consultancy Oliver Wyman predicts they’ll account for nearly a quarter of total AUM by 2027.
ETPs are popular for several reasons:
Investors can add an asset to a portfolio without having to hold it directly. This is particularly beneficial to those seeking exposure to crypto because purchasing through exchanges, which are mostly unregulated or underregulated, can be risky. Buying from exchanges also means investors must decide whether to store their holdings in hot (online) or cold (offline) wallets or trust their assets to the exchange.
ETPs are listed on mainstream stock exchanges, so investors can buy and sell them via a broker or trading platform. They can be held in a portfolio alongside traditional assets such as shares and bonds, allowing investors to incorporate crypto returns into overall performance.
ETPs are supervised by financial authorities and must adhere to the same rules as other products listed on mainstream exchanges. For instance, in Europe providers must meet requirements set out by EU regulators in terms of transparency, accounting and disclosure. Physical ETPs are also structured to protect investors: a custodian stores the underlying asset, and a trustee oversees the management of the product and its holdings.
Considering crypto ETPs are relatively new to the market, they’ve already attracted significant inflows of capital from investors seeking to diversify their portfolios. According to figures published by consultancy EFTGI for the first half of 2023, 166 crypto products are listed on global exchanges with a combined AUM of just over $9 billion.
Physical ETPs
ETPs aim to mirror the performance of the underlying asset, but there are two different types of products, and they take different approaches. Physical ETPs buy and hold the asset, while synthetic ETPs use complex financial instruments called derivatives to replicate performance.
Referring to a crypto ETP as physical may seem like a misnomer, but it follows the same principle as a gold ETF buying gold and storing it in a vault. In CoinShares case, Jersey-regulated digital custodian Komainu stores the underlying assets.
Synthetic ETPs serve a purpose in some cases, but investors might choose physical ETPs for several reasons:
Holding the crypto makes a physical ETP’s replication of the underlying asset’s spot price (for immediate delivery) more accurate
Physical ETPs are more transparent and consequently easier to understand because they don’t involve derivatives
The provider of the derivative used in a synthetic ETP could fail to meet its obligations, leading to counterparty risk
CoinShares issues 15 physical ETPs offering access to a variety of underlying cryptos including bitcoin, ether, Cosmos and Polkadot. These products are listed on the Swiss SIX exchange, Germany’s Börse Xetra and Amsterdam & Paris-based Euronext. Fees range from 0% for the ether ETP (for the time being) to 1.5%.
Learn about CoinShares Physical ETPs.
CoinShares also issues two other types of physical ETPs.
Staked Physical ETPs
Proof of stake (PoS) is a consensus mechanism which requires validators to lock up (or ‘stake’) a certain amount of crypto so they can participate in the verification of a protocol’s transactions. In contrast, bitcoin’s proof of work (PoW) mechanism involves solving complex mathematical problems. Ethereum moved from PoW to PoS in September 2022, a switch dubbed ‘the Merge’ in the crypto space.
Validators earn rewards for processing transactions, allowing them to generate a passive income from their holdings. The minimum stake on the Ethereum network is 32 ether (worth $66,048), which may be prohibitively high for some, so protocols such as Rocket Pool allow holders with smaller amounts of ether to participate.
However, like storage, staking is complex, especially for investors who aren’t crypto native.
To address this problem, CoinShares launched staked ETPs to offer investors access to staking rewards via a product that they can hold in a portfolio. CoinShares manages the entire process, from choosing the number of coins to lock up to tracking the rewards, while Komainu continues to store the staked coins.
Learn about CoinShares Physical Staked ETPs.
Index Physical ETPs
One of the greatest benefits of holding an index ETP is it offers broad exposure to a range of assets. While an equivalent of the S&P 500 doesn’t exist in crypto markets, CoinShares partnered with Compass Financial Technologies, a specialist in multiple asset class indices, to create two indices which CoinShares Physical ETPs track:
The Top 10 Crypto Market ETP tracks the performance of the ten biggest cryptos by market capitalisation (excluding privacy coins and stablecoins), which account for 80% of the total market.
Learn about CoinShares Physical Top 10 Crypto Market ETP.
The Smart Contract Platform ETP provides exposure to a maximum of 10 of the coins issued by protocols developing and maintaining the crypto infrastructure layer, such as Ethereum, Cardano and Tron.
Learn about CoinShares Physical Smart Contract Platform ETP.
The weighting for the individual coins held in both of these products is based on their market capitalisation. However, it’s capped at 35%, regardless of each coin’s market share, to boost diversification and reduce concentration risk. These ETPs also automatically rebalance (return to their original allocation) quarterly to further lower concentration risk. And as with the staked ETPs, the annual fees have been reduced to 0.00% for the time being.
XBT Provider
XBT Provider was a pioneer in the crypto ETP space. It launched the Bitcoin Tracker One in 2015, the first open-ended product tracking the performance of bitcoin listed on a mainstream exchange. The Ether Tracker One followed in 2017. These products have proved popular with investors, attracting capital inflows of $1.5 billion (as of 22nd September 2023), and trade in both Swedish krona and euros.
Unlike the physical ETPs discussed in the previous section, XBT Provider ETPs are synthetic. To reassure investors that these products can meet their liabilities, licensed Certified Public Accountant The Network Firm tracks their proof of reserves (PoR), a metric widely employed in the crypto industry to demonstrate an issuer or exchange is solvent. CoinShares publishes a real-time update of the PoR for all its products.
XBT Provider ETPs are listed on the NASDAQ Stockholm index, so they can be traded like any other mainstream financial asset, and they’re subject to the same regulatory oversight and compliance requirements. XBT Provider’s prospectus has been approved by the FSA, Sweden’s financial authority.
Investors can trade these products through any broker with access to the NASDAQ Stockholm, including Nordnet and Avanza, Sweden’s two largest brokers.
Learn about XBT provider ETPs.
Key risks
As with any investment, there are risks involved when buying and selling physical crypto ETPs.
Despite being physically-backed by the underlying crypto, investors’ capital is at risk and investors may lose part or all of their investment, as investors are fully exposed to the price of crypto which has been known to experience both large gains and losses
Crypto ETPs are generally structured as debt securities, and not as equities.
The bid/offer prices of the ETP on an exchange will likely differ from the trading price of the underlying cryptocurrency
It is important to remember that past performance is not an indicator of future performance. If in doubt, investors should seek professional advice to ensure an allocation to crypto fits with their overall goals and objectives.