Comparing crypto ETPs: 6 key things to consider

Introduction

The considerable growth of crypto ETPs in Europe has created an abundance of choice for investors, making careful selection essential. Before diving into the process, it's important to understand the different types of ETPs—ETCs, ETNs, and ETFs—each with their own structures and implications.

This article outlines six key factors to evaluate when choosing a crypto ETP.

1. Physical vs synthetic structure

A fundamental distinction exists between physical and synthetic ETPs:

• Physical ETPs offer direct exposure to the underlying cryptocurrency. Your investment is backed by actual crypto held in secure custody. This provides transparency and reduces counterparty risk with swap providers.

• Synthetic ETPs use derivatives to replicate cryptocurrency performance. While they can be useful in certain situations, they add complexity and counterparty risk.

• Recommendation: For many investors, physical ETPs offer greater transparency and simplicity.

2. Issuer Track Record and Experience

Given the complexity of cryptocurrencies, it's particularly important to choose an ETP issuer with solid experience in both crypto markets and asset management.

Consider:

• Years in the market: How long has the issuer been operating crypto ETPs?

• Assets under management (AUM): A larger AUM may indicate trust and stability

• Track record through market cycles: Has the issuer navigated both bull and bear markets?

• Regulatory standing: Is the issuer publicly traded or otherwise subject to strict oversight?

CoinShares, for example, launched Europe's first Bitcoin ETP in 2015 and is publicly traded on Nasdaq Stockholm, meeting strict regulatory standards.

3. Liquidity and Trading Costs

Liquidity—the ability to buy and sell easily—is essential, especially during periods of market stress.

• Bid-offer spread: The difference between the highest price a buyer will pay and the lowest price a seller will accept. A narrower spread indicates better liquidity and lower trading costs.

• Trading costs: Beyond the ETP's fees, consider what your broker charges for transactions. Some platforms have zero-commission trading for certain products.

• Tip: Compare spreads across different times of day and market conditions. Tighter spreads generally mean more efficient pricing.

4. Transparency and Verification

Transparency is vital for any investment, but especially important for crypto:

• Coin Entitlement: ETPs are required to publish daily the exact quantity of crypto-assets backing the product. This tells you exactly how much cryptocurrency each share represents.

• Independent attestation: Some providers go further with third-party verification. CoinShares, for example, uses LedgerLens for independent attestation of underlying assets—helping ensure holdings are accurately represented.

• Real-time verification: Look for issuers that allow you to track reserves in real-time, confirming each product is backed by the correct amount of digital assets.

5. Security and Custody

Security is paramount for any asset-backed product:

• Custodian quality: Choose an issuer that uses a regulated, specialized digital asset custodian with appropriate protections in place. Custodians like Komainu or Zodia use institutional-grade cold storage.

• Segregation: The issuer should keep assets segregated between products—sometimes called "limited recourse." This means problems with one product don't affect others.

• Bankruptcy protection: Special purpose vehicle (SPV) structures are designed to provide additional protection, ringfencing assets from issuer bankruptcy.

6. Fees and Total Cost of Ownership

Beyond the headline management fee, consider the total cost:

• Management fees (TER): The annual percentage charged by the issuer. These have dropped significantly in recent years, with some ETPs now charging 0%.

• Staking rewards: For proof-of-stake cryptocurrencies, some ETPs can offer staking rewards that can offset or exceed management fees.

• Tracking error: How closely does the ETP track the underlying asset's price? Fees and operational factors can cause divergence.

Example: CoinShares offers ETPs with 0% management fees and transparent staking rewards ranging from 1.25% to 5.0% p.a. depending on the token— which may result in a net positive yield.

Additional Considerations

• Exposure type: Do you want exposure to a single asset (Bitcoin, Ethereum) or a diversified basket? Index ETPs can offer automatic diversification and rebalancing.

• Tax efficiency: Some ETP structures may offer tax advantages in certain jurisdictions. Consult a tax advisor for your specific situation.

• Physical redemption: Some ETPs allow holders to redeem for actual cryptocurrency—a useful feature for those who eventually want direct ownership.

Evaluation checklist

1. Is the ETP physically backed by actual crypto?

2. Does the issuer have a proven track record in crypto markets?

3. Are spreads competitive and liquidity adequate?

4. Can you verify holdings through independent attestation?

5. Is custody with a regulated, specialized provider?

6. What is the total cost including fees and any staking rewards?

Key takeaways

• Physical ETPs offer greater transparency than synthetic alternatives

• Issuer experience and track record matter—especially through market cycles

• Look beyond headline fees to total cost of ownership

• Independent verification and secure custody are essential

• Staking rewards can contribute to additional returns on PoS cryptocurrencies