Key takeaways:

• Crypto ETPs exist on various stock exchanges, along with newer crypto ETFs.
  
• Bitcoin ETPs and Ethereum ETPs are investment vehicles that focus on those specific cryptocurrencies.
  
• Multi-asset ETPs diversify and own multiple cryptos instead of being restricted to a single currency.
  
• Blockchain is the underlying technology behind cryptos and can serve as an investment pathway to crypto.
  
• Crypto mining firms are, or at least used to be, a great way of gaining exposure to bitcoin and other cryptocurrencies.
  
• The Canadians launched the first Bitcoin ETF, called BTCC.

Multi-crypto and bitcoin exchange-traded products (ETP)

It’s a brave new world, and one of its features is currencies backed neither by a national government nor central bank nor any underlying asset. The Swiss pioneered the crypto ETP concept and offered the first one back in 2018. Amun Crypto Basket ETP was designed to track an index based on the movement of five leading cryptocurrencies; this is an example of a multi-crypto ETP (further explained below). The group’s name was later changed to 21shares. Many retail trading platforms currently allow you to invest and trade such ETPs.

Cryptocurrency ETPs invest in popular all-digital currencies like bitcoin, ripple and ethereum. These ETPs are “physically” backed, meaning that settlement is done in the underlying asset rather than using cash, as is the case when selling regular stocks. Cryptos do offer many advantages compared to traditional currencies. Though they are volatile and still becoming integrated into the financial system, they provide investors with access to an asset class separate from the financial system. In this sense, they serve as a new way to diversify holdings during times of turmoil, aside from cash and gold. The risk involved remains high, of course, and this is the raison d’etre of crypto ETP. These securities offer exposure to cryptos without concerns about custody or the need to directly own crypto coins yourself.

The risk and return tradeoff is straightforward. Cryptos are very volatile, which means you can make a lot of money or lose your shirt if your exposure is too great (as has happened to many an amateur trader when buying from Coinbase or River). Direct investors face operational concerns regarding storing or otherwise having custody of the assets. With an ETP, on the other hand, you can let the pros handle the infrastructure, security concerns, and the heat if anything should go wrong. The active management style of the average ETP also grants you access to a greater spread than on regular market index returns, though this comes at the cost of higher fees.

A multi-crypto ETP follows the same framework as described above, but its underlying assets include multiple cryptocurrencies, perhaps both established ones and new entrants to the market. Multi-asset crypto ETPs increase diversification and thus diminish risk. The first of its kind was launched by 21shares and has performed well at times:

Blockchain and bitcoin mining companies

If you are building out a crypto-based portfolio or want to invest in other sorts of crypto-related products, you should not overlook the very companies that have deployed capital to corner the crypto mining industry. Some major players in this space include RIOT, MARA, ARB, and HIVE. The argument for investing in these firms is that they mine a lot of coins and generally hold on to them – as prices rise, so do their balance sheets. It should be understood, though, that most cryptocurrencies are designed to allow only a certain number of coins, so the number of undiscovered ones is continually dropping. Some of these firms have hockey-sticked in the past, like MARA:

Blockchain is the underlying technology behind bitcoin and cryptocurrencies generally. Without blockchain, there is no bitcoin; a number of other applications also depend on blockchain technology. In a word, the blockchain ecosystem continues to encompass some very exciting investment opportunities. 

As an investor, one could do worse than becoming aware of this technology’s potential and beginning a rigorous due diligence on blockchain-adjacent companies like GMO Internet, Advanced Micro devices, Micron technology, Argo, Nvidia, Overstock, Silvergate Capital, Square and PayPal. Though currently overshadowed by the AI boom, some analysts maintain that we are still in the early stages of a crypto major revolution – getting some exposure to blockchain could be like buying Apple stock in the 80s. It may well be that several industries will soon no longer be the same, as blockchain starts to disrupt supply chains, communication, banking, healthcare, and security services.

Bitcoin ETF fundamentals

BTCC is a pure-play bitcoin ETF. It is a traded security for registered Canadian investors and was launched by Purpose Investments. It was the first of its kind, though retail investors have many comparable options today. At the time, though, Canadian regulators’ decision to accept the bid was somewhat controversial. Crypto infrastructure was not working all that well back in 2017, but a lot has since changed in terms of ETFs’ crypto support systems. Custodians are regulated now, the crypto futures market is blossoming, and market makers can trade in the crypto market directly. Key hurdles like market acceptance of the bitcoin asset class are a thing of the past.

How do funds like BTCC work, mechanically speaking? Each of its shares is backed by real bitcoin, meaning no notes or futures contracts. It relies on a “cold wallet” custody solution, so its BTC is not stored in “hot” wallets, which are at greater risk of being hacked. How is asset fluidity maintained? This is done in conjunction with broker-dealers. Digital asset transactions are settled instantly, whereas securities markets settle in t+1, a disconnect which the fund’s tech group manages internally. The average investor does not necessarily want to open an account on Coinbase or other crypto exchanges, so why not let professional managers handle the details? In the US, the SEC’s position on bitcoin and its use in ETFs continues to evolve rapidly. Some options worth investigating include iShares Bitcoin Trust (IBIT), Fidelity Wise Origin Bitcoin Fund (FBTC), and Grayscale Bitcoin Trust ETF (GBTC).

In conclusion

Crypto-backed ETPs and ETFs are a convenient and relatively safe way to gain exposure to the constantly evolving digital asset space. They allow traders to dip a toe into the crypto world without the technical and security burdens of direct ownership. However, there are some trade-offs to consider, including management fees and exposure to unpredictable regulatory shifts. More importantly, investors should be aware that the underlying volatility of cryptocurrencies isn’t mitigated by wrapping them in a different investment vehicle. Used thoughtfully, these products can play a role in a diversified portfolio, but only as long as you understand what you’re actually buying.