Amid Bearish Conditions, First Cryptocurrency ETP Launches In Switzerland

The launch of a cryptocurrency exchange traded product (ETP) at the end of November, on Switzerland's Zurich-based SIX Exchange, hasn't gone unnoticed by savvy investors hungry for some good news about the currently bearish asset class.

HODL 300 Minute Chart

The Amun Crypto Basket Index (SIX:HODL) offers exposure to the four most liquid digital currencies, as defined by market capitalization: Bitcoin (BTC), Ethereum (ETH), Ripple (XRP) and Litecoin (LTC).

For those unfamiliar with the structure of an exchange traded product, it's a type of security whose value comes from other investment vehicles—such as currencies, commodities or in this case cryptocurrencies—to which it is benchmarked. Its pricing is derived from the assets it holds and trades intra-day.

There are already two rival products available which offer alt-currency exposure, though they're structured differently and offer more limited, single cryptocurrency exposure. Scandinavia’s XBT Provider offers access to Bitcoin and Ether) via exchange traded notes (ETN) that trade on the NASDAQ Stockholm Index. As well, in the US, Greyscale offers the Bitcoin Investment Trust (OTC:GBTC) which trades over the counter.

Upside But Also A Downside

Lars Seier Christensen, Chairman of the Concordium Network and the Concordium Foundation, says there are both advantages and disadvantages associated with investing in this sort of ETP.

“[The] upside: usually, these baskets of exchange traded products are designed to give the investor a broader, more balanced access to a sector of interest, where the investment manager is offering to do the hard work of picking what should be in the shopping basket, getting liquidity organized, managing pricing, booking the trades and creating an indexed price for simple valuation.”

Essentially then, this could make the choice more interesting and potentially profitable for investors, while also making it more easily accessible to less experienced investors who might not otherwise be able to gain full access to the opportunities offered. Adds Christensen:

“The benefit is that they are simple, passive, relatively cheap, hopefully managed by people who know more than we do, and [are] often covered by collateral in the wholem which can be safer. The objective of the manager is to attract assets for which they take an annual fee.”

However, Christensen further explains, quite often new markets with unstable levels of liquidity can be volatile. This makes them subject to interference, requiring a proportional amount of management energy, for which the investor pays high fees.

“As an example, the blue-chip equity and bond market ETFs ETPs ETNs are usually priced around 50 basis points, some as low as 25, but not many above 75-100. New markets like crypto, or far off markets in mining, for example, are relatively expensive and carry high degrees of price volatility. That is the underlying choice the investor has to make in riskier environments.”

Market Timing; Shifting Customer Demand

The introduction of this newly released fund wasn't optimally timed either, since trading across the cryptosphere has fallen off alongside the overall collapse in digital currency prices. Nonetheless, Christensen points to the what occurred after the 2015 launch of XBT Provider's Bitcoin and Ethereum ETNs.

"In the first long period [after they were introduced] little happened. But in the 2017 Q4 crypto rally, these two very simple instruments become, for a few months, the most traded instruments with several Scandinavian retail brokers.

Hundreds of new enquiries came in on a daily basis, from clients seeking safe, regulated exposure to the two main cryptocurrencies. When I checked with one large broker this morning, they hadn’t had a request about these ETNs for several weeks and trading volumes that used to be higher than among retail darlings such as Amazon (NASDAQ:AMZN), Tesla (NASDAQ:TSLA) or Google (NASDAQ:GOOGL), had virtually disappeared.

Talk about client loyalty.... this must be very concerning for the many newly listed products and new exchanges currently planned. For current investor demand, the space is completely overcrowded and there will be many failed launches and casualties, I think.”

Alex Mashinsky, CEO of Celsius, a blockchain-based payment network, has a more optimistic take. He believe that institutions world-wide and family business offices are looking to add digital currencies to their portfolios. The diversification efforts in this regard would generally add 5-10% worth of holdings in this asset class, making the potential benefit for these funds considerable.

“Many do not know how to buy and hold such assets or don’t want to touch the underlying asset.

Because of this, many ETF, ETN and ETP products have been launched over the past three years. Each jurisdiction has its own rules and regulations. As well, many new funds have not yet been approved and are pending before regulators.

As such, there is more demand than supply for such products. There is also a shortage of regulated custodians these institutions can use to buy and hold such assets,, which creates even more demand for such derivatives.”

According to Invest In Blockchain, during its first full week of trade, the Amun Crypto Basket ETP saw $425,000 USD worth of trade. "It beat gold, silver and oil," the site said. Equities.com noted that the ETP is "showing volume well over twice that of any other ETP available in Swiss markets."

Mashinsky expects dozens of such funds to gain approval in the near future, as both regulators and customers become more comfortable with the asset class.