Exchanges vs ETPs: What’s the Best Option for Crypto?

At a casual glance, investing in crypto through a crypto exchange looks easy: a couple of clicks are enough to open an account and start trading. While technical barriers to entry have lowered these past few years, it is more important than ever to think wisely about your investment route - and exchanges might not be the best way forward.

Someone seeking to invest in crypto will see two main paths open up: crypto exchanges and Exchange Traded Products (ETPs). 

Crypto exchanges, such as Binance or Coinbase, are platforms on which people can buy and sell cryptocurrency. As an exchange user, you create an account and transfer funds to acquire a desired amount of crypto, which can then be traded on the same platform. Having bought crypto on the exchange, you can either decide to have your assets remain in exchange custody or to store your assets yourself, for example in a cold storage wallet - this is called self-custody.

Exchange Traded Products are listed securities that trade on a securities exchange, such as Nasdaq, Xetra or Euronext. You buy them through the same channel you acquire your stocks and ETFs from (typically your broker or your bank). Once you have invested in an ETP, you can trade it on traditional securities markets. It is integrated into your traditional portfolio, alongside your other investments. For more information, refer to our article What are Crypto ETPs.

Crypto exchanges might look like the “easiest” way to get started with crypto, especially for new investors, but they come with several drawbacks.

The crypto landscape is still widely unregulated - and so are some of the biggest crypto exchanges in the world, which operate without oversight from any government or financial institution. Understanding whether an exchange is regulated or not requires specific legal skills.  For instance, an exchange can be regulated in a specific location and unregulated in others. Of course, most unregulated exchanges won’t disclose their legal status and its dangerous consequences.

This lack of regulation opens a world of risks for investors. The recent FTX collapse shows mismanagement of funds can happen even with once-major actors. Investors who had decided to store their assets directly on the platform saw their funds vanish almost overnight, with little to no hope to recover them. 

Hacks are also a concern when it comes to exchanges. If your assets are in exchange custody, and the exchange gets “broken into”, you stand to lose them. Once again, this isn’t just a theoretical scenario: such thefts have happened multiple times in the past years, notably to Mt. Gox, once the world’s largest Bitcoin exchange.

With the risks of crypto exchanges in mind, self-storing might sound like a safer option, but it also comes with drawbacks. When you choose to self-custody your assets, you are entirely responsible for them: there is no one to turn to if something goes wrong. 

Don’t underestimate the technical skills required to securely store your crypto in the long run. Headlines are replete with millions worth of crypto lost because of a burnt hard drive or lost key. In self-custody, there is no way to retrieve your assets if you forget your seed phrase, the string of words that gives you access to your cryptocurrency wallet. There is no “Forgot Your Password?” button in crypto. And with hackers continuously stepping up their game, signing a malicious transaction or interacting with a dangerous smart contract is a day-to-day hazard even expert users might fall victim to.

Moreover, investors seeking to trade their crypto - even at a slow pace - will face two additional issues with self-custody:

• First, crypto traded through an exchange can’t be incorporated into a structured portfolio that incorporates pension or tax advantages.

• Then, their crypto will still have to be taken to an exchange to be traded, or their wallets connected to DeFi protocols to perform swaps. The first option exposes them to the risks we covered above, with a last - but not least - risk factor: transferring crypto from a cold wallet to an exchange is a single-chance operation where no mistakes can be made, or the funds will be lost forever. The second one (DeFi) exposes them to complex platforms where the risk of hacking, scamming and error is even greater for newcomers.

   

Crypto ETPs, on the other hand, have advantages that almost perfectly counter exchanges’ shortcomings.

ETPs are regulated financial products. This means that they follow strict accounting and financial rules, under the control of national or international agencies. 

To dig deeper into ETP structure, check out our article: What’s a Crypto ETP?

We have seen that crypto exchanges are risk-prone, for structural reasons such as lack of regulation, but also because of their design. Users are left to their own devices on an exchange, and a few wrong clicks can lead traders to making costly mistakes, by withdrawing funds from the wrong blockchain or sending them to an incorrect address.

A crypto ETP can be traded like any other security, on a traditional exchange. It can blend seamlessly with your standard portfolio - even integrated into a pension/tax advantaged account depending on your country’s regulation. You are therefore able to diversify your portfolio through a secure, regulated investment vehicle. 

Of course, keep in mind that investment always comes with risk: crypto ETP values reflect market situations, and, just like their underlying assets, their price can rise… or fall.   

At the end of the day, you have to research the options and choose what’s right for your situation. If you are a short-term investor willing to trust an exchange and/or dedicate significant time to securely self-storing your assets, you may decide  crypto exchanges are the best choice.

On the other hand, if you are a longer-term investor, and don’t want to either leave your crypto at the mercy of an exchange or be responsible for safeguarding your assets, then crypto ETPs could be a perfect fit. 

Once you are ready to make the leap into crypto ETP ownership, all you have to do is turn to your broker to browse their ETP list. You might then see there is a wide selection available. How can you make the most informed choice?

Start by researching each crypto ETP provider carefully: do they have a proven track record in the financial industry? Then check how the crypto ETP is structured: is the collateral held by a reputable independent custodian? Finally, have a look at management fees.

If you are looking for an easy, regulated way to add crypto to your portfolio, crypto ETPs can be an interesting option. Want to keep reading and learning about crypto ETPs? We have prepared a trove of articles for you to explore in our academy. 

And if you want to go ahead and check CoinShares current ETP offering: fees and prices are available on our website.

Please remember, there are still risks associated with the CoinShares XBT Provider’s ETPs, such as counterparty and volatility risks, that they are complex products, may be difficult to understand and have a high risk of capital loss.