How to Choose a Crypto ETP?

Investing in cryptocurrencies gives you the flexibility to choose between targeted or diversified exposure, each catering to different investment strategies and risk appetites. The two primary modes of exposure are individual cryptocurrencies and baskets of cryptos.

Investing in individual cryptocurrencies means focusing your investment on a specific digital asset. This strategy allows for a more in-depth understanding and tracking of a single cryptocurrency. Before selecting a cryptocurrency for investment, consider several essential characteristics:

Market Capitalisation — This reflects the total dollar value of a cryptocurrency, arrived at by multiplying the total supply of coins by the current price of an individual unit. A larger market cap typically suggests a more established cryptocurrency, although it does not guarantee stability or profitability.

Volatility — Cryptocurrencies are known for their high price volatility. Being aware of this volatility can help you better understand the potential price fluctuations of your chosen digital asset.

Developer Activity — The number of developers actively working on a crypto project can be a useful indicator of the level of support and potential innovation within the ecosystem. A vibrant community of developers often signals ongoing development and maintenance.

Transaction Volume — This refers to the number of transactions facilitated by the cryptocurrency over a given period. A higher transaction volume could suggest more widespread usage, but it does not necessarily imply increased value.

On the other hand, baskets of cryptos, often referred to as crypto indices, offer exposure to a variety of cryptocurrencies within a single product. This diversification approach allows for potential risk mitigation, as your investment is not tied to the performance of a single cryptocurrency.

In choosing a basket of cryptos, it's essential to examine its composition. Understand which cryptocurrencies are included, their weightings, and the criteria for their inclusion or exclusion. This helps ensure your investment aligns with your risk tolerance and investment objectives.

Once you have determined your preferred crypto exposure—be it through a single digital asset or a diversified basket—you can then select an ETP that best fits your strategy.

Over the past decade, cryptocurrencies have evolved from niche investments to a widely recognised asset class, offering a new level of diversification and potential returns. This transition has been facilitated by the advent of Exchange-Traded Products (ETPs), which have seen remarkable growth in Europe in recent years. The surge in crypto ETP offerings has created an abundance of choice for investors, necessitating comprehensive due diligence in selecting the right product.

Before diving into the selection process, it is crucial to comprehend the various types of ETPs: Exchange-Traded Commodities (ETCs), Exchange-Traded Notes (ETNs), and Exchange-Traded Funds (ETFs), each having unique product structures and implications on liabilities. Another critical distinction to note is between Synthetic and Physical ETPs, with the latter offering direct exposure to the underlying asset, in this case, cryptocurrency.

Considering the nascence and complex nature of cryptocurrencies, it becomes crucial to choose an ETP issued by a provider who possesses a robust track record in both crypto markets and asset management. This ensures they have an in-depth understanding of the crypto assets their products are tracking.

Fees — The management fees among crypto ETPs vary significantly, ranging from 2.5% to 0.0%, depending on the underlying asset. For instance, CoinShares Physical Ethereum has reduced its management fees to 0.0% p.a., making it a cost-effective choice for investors interested in Ethereum exposure.

Liquidity — An essential aspect to consider is the tradability of the product, especially during times of market stress. The spread of an ETP is the difference between the bid price (the highest price a buyer is willing to pay) and the ask price (the lowest price at which a seller is willing to sell). It's a key indicator of an ETP's liquidity - a narrower spread typically implies higher liquidity. While it doesn't guarantee, it often suggests that the ETP can be bought or sold swiftly with less impact on its price, implying a level of price efficiency. Importantly, tighter spreads can also lead to lower overall transaction costs for investors.

Trading Costs — Apart from the intrinsic costs associated with the ETP, investors also need to factor in the fees charged by brokers and online trading platforms.

Transparency is vital in all investments, but especially so with a new asset class such as crypto. ETPs should publish a daily Coin Entitlement showing exactly how much crypto is backing the product. Some providers go a step further and offer independent attestation of the underlying crypto via services such as LedgerLens. This ensures that the holdings of the ETP are accurately represented and can provide extra peace-of-mind for investors.

As with any asset-backed product, security is paramount. The issuer must hold coins securely, preferably with segregated collateral between products. This is sometimes referred to as ‘limited recourse’.

Choosing an issuer that utilises a regulated custodian specialising in digital assets, with appropriate safeguards in place, can offer an added layer of protection.

Investing in crypto ETPs can be an effective way to gain exposure to the cryptocurrency market. However, it's essential to choose the right product, taking into account issuer expertise, costs, transparency, and security. While navigating this relatively new investment territory may seem daunting, careful due diligence can help investors make informed investment decisions. 

For more information on CoinShares’ range of crypto ETPs, visit our product page.