One of my favorite ways to buy into the crypto scene is to use ETPs like ETFs, ETNs and ETCs, depending on what’s available and what I’m looking for. I’ll be defining these shortly and the differences between them.
Throughout this article, I will be referring to Bitcoin tracker products, but everything applies to trackers of other cryptos as well.
Why Buy a Bitcoin Tracker?
For a myriad of reasons that I’ve previously discussed on this blog, you might not want or be able to buy Bitcoin and crypto from a crypto exchange – wiring fiat currencies and then trading that money for cryptos such as Bitcoin and Ethereum.
Let’s say you want to buy Bitcoin, but you don’t want to sign up to a crypto exchange and buy (and store) the cryptocurrency directly.
Or perhaps your bank prevents you from transferring fiat currencies to the well-known exchanges, effectively blocking you from doing what you want to do with your money. That’s a discussion for another article, although I think that this ridiculous situation with banks is just temporary and will not be an issue in a few years’ time at max.
So what are your alternatives?
One way is to buy Bitcoin in a peer-to-peer fashion, using Hodl Hodl. However, this is not an ideal way to proceed if you want to buy substantial amounts (say €10,000 or more in Bitcoin).
Thankfully, there is now a very easy way to get crypto exposure, using traditional stockbrokers. Banks won’t hassle you, as from their perspective, you are just transferring money to a regular stockbroker.
In the case of an eventual sale, and subsequent withdrawal of fiat into your bank account, their reasoning is the same. It’s your regular stockbroker, no foul play suspected, compliance boxes checked, all good to go.
What about big hedge funds and institutions? According to research done in 2021, institutional investors in Europe prefer exchange-traded instruments over buying crypto directly. Over half (53%) use ETPs to access bitcoin, while about a quarter (23%) use structured products and only one in five (21%) use direct investment.
To recap on why you would want to buy crypto through a stockbroker:
- Your bank/s refusing to allow transfers to/from crypto exchanges
- Not trusting yourself in being able to self-custody your cryptos
- Buying through a company – audits and accounting becomes complex when trading through exchanges.
- You’re an institutional investor
The alternative lies in using your regular stockbroker to buy into crypto funds.
It’s time for some definitions.
The global term for all these products is Exchange-Traded Products (ETPs). There are several types of ETPs, like:
- exchange-traded funds (ETFs)
- exchange-traded notes (ETNs)
- exchange-traded cryptocurrencies (ETCs)
When you start looking for crypto products you can buy on stock exchanges, things can get quite confusing. In Europe, when you see products listed as ETPs, the legal structure is actually an ETN. You will also find ETFs and ETCs, but ETNs are definitely the most common.
Bitcoin and crypto ETFs are not yet available in Europe and the U.S., although they are available in Canada and Brazil.
When compared to the U.S. however, Europe offers much easier access to crypto products through ETPs – this is done through ETNs, and ETCs to a lesser extent. These ETPs offer exposure to the cryptocurrency market without the concerns of custody or owning the underlying asset. By investing through an ETP, investors can benefit from institutional-class custody, simplified trading through a standard brokerage account, greater liquidity, and transparent trading.
Unlike ETFs which are considered investment funds, ETNs and ETCs are structured as an unsecured debt, meaning that the issuer – usually a bank – can potentially not be able to repay the principal and default the bond.
So, once you login to your favorite broker, you need to find these funds and simply buy their stock. Some of the most famous ones (and their country of domicile) are the following:
- BTCetc – Physical Bitcoin ETC – Germany
- WisdomTree Bitcoin ETP (BTCW SW) – Jersey
- 21Shares Bitcoin ETP (ABTC SW) – Switzerland
- VanEck Vectors Bitcoin ETN – Liechenstein
The BTCetc Physical Bitcoin ETC from HanETF is an exchange-traded cryptocurrency (ETC) that tracks the price of Bitcoin. This ETF company coined the term exchange-traded cryptocurrency (usually the term ETC refers to exchange-traded commodity) and comes with the extra benefit that you can convert and withdraw to actual Bitcoin whenever you want, subject to some fees. This is the biggest European Bitcoin fund by a significant margin, signifying that investors are attracted by the convertibility offered by this setup. It also has the highest TER at 2.0% p.a. You can find it traded on several countries’ exchanges, giving you the flexibility to invest in EUR, USD or CHF. From my understanding, this ETC is identical to an ETN save from the ability to convert to Bitcoin on demand. Custody is provided by BitGO.
The 21Shares Bitcoin ETP works with fully collateralized debt, meaning that it is 100% backed by Bitcoin held in an independent trust for investors, while custody is provided by Coinbase and possibly Kingdom Trust, Bitcoin Suisse and Copper. All of them are top-tier custodians. This ETP is regulated and domiciled in Switzerland. Even though it is 100% backed, there is still a risk of theft, hacking, as well as the need to deduct the costs of the liquidation should any player within this ETP become insolvent. The TER is 1.49%.
The Van Eck Bitcoin ETN is a fully collateralized exchange-traded note that invest only in Bitcoins. Note that not all ETNs are collateralized, making this ETN particularly safe compared to others. The note aims to replicate the performance of the MVIS CryptoCompare Bitcoin VWAP Close Index (MVBTCV Index). The custodian is Bank Frick and the fund is domiciled in Liechtenstein. The base currency is EUR and TER is 1.00%.
flatexDEGIRO offers several crypto trackers that follow the underlying performance of digital currencies, such as Bitcoin or Ethereum. There is no need to set up a crypto wallet or use a crypto exchange.
As I mentioned, while the US asset markets are usually the most innovative, they have been dragging their feet on crypto fund regulation. Several companies have applied to publish Bitcoin ETFs but none have been approved by the SEC so far.
Residents of the US are therefore out of luck when it comes to these types of products. As an alternative to the lack of ETFs and similar products, Grayscale created the Grayscale Bitcoin Trust as a roundabout way to satisfy that pent-up demand. The Grayscale Bitcoin Trust ends up underperforming compared to the European ETPs due to some peculiar properties it has since it is a trust, not an ETF. Overall, it is more expensive, less accessible, and slower than the average ETP, although fees are in line with other Bitcoin ETPs.
A futures-based ETF (not ideal for several reasons) has also been launched in the US. Spot ETFs in the United States still seem a long way off though, as the administration is keen on preventing the public from accessing such instruments.
Canadian residents have it better than their US counterparts, as several ETFs launched there in 2021: Purpose Bitcoin ETF (BTCC), Evolve Bitcoin ETF (EBIT), CI Galaxy Bitcoin ETF (BTCX), 3iQ CoinShares Bitcoin ETF (BTCQ), and Fidelity Advantage Bitcoin ETF.
The Canadian bitcoin ETFs differ from the ones listed in the US in that they are all backed by ‘physical’ bitcoin, whereas the US-listed bitcoin ETFs are only backed by bitcoin futures contracts, which increases both complexity and costs of managing an ETF.
This landscape is bound to go through rapid changes in the next years, but the fact remains that if you have access to them, these ETP and ETN options are an excellent way to get exposure to cryptos without the hassle of buying the underlying asset directly.
My Favorite Bitcoin Tracker Products
Not all tracker products are created equal. There are a few main questions to ask yourself when choosing a product:
- What’s the size of the fund?
- Who’s the provider?
- What is the total expense ratio (TER)?
- Where is the fund domiciled?
- What’s the replication method?
- What currency do I need to use?
A bigger fund inspires more trust, although you also need to consider how long it’s been on the market. If it’s a newer fund, then I would look at the provider, and if they are well-established with a long track record of solid ETF products, then the fund size would not be that important.
Some reputable providers are WisdomTree, VanEck and CoinShares.
The TER is very important to me. I am fine with paying money to compensate for the storage costs and the ancillary costs of operating the fund, but a 1% difference can make a significant difference in returns over the long-run, especially given crypto’s growth potential. I typically look for an expense ratio of 1% or lower.
Lastly, I want to make sure that they are physically-backed. This means that they for every dollar/euro invested in the fund, they hold the equivalent value in Bitcoin, usually in safe cold storage. This is not usually an issue, as all the tracker products I’ve seen in Europe use physical backing as their replication method.
It’s not a bad idea to split your funds between different providers if they have similar setups. This will minimise the risk in the unlikely event that a provider goes out of business or suffers a catastrophic loss of its physical backing.
Right now, as a European resident, my choice is the VanEck Vectors Bitcoin ETN fund as it has a low total expense ratio (TER) of just 1% per year while being based in Liechtenstein, which is a country whose financial sector I deem to be of sufficient quality. Its base currency is also EUR which is ideal since a good chunk of my savings are typically stored in Europe’s currency, the Euro.
On the other hand, I also use the WisdomTree Bitcoin ETN to diversify between providers and also to be able to invest my USD savings and thus avoid currency conversion costs. The Coinshares Physical Bitcoin ETN would be an alternative – it is a slightly bigger fund with negligibly higher TER but it is domiciled in Jersey instead.
Buying Stocks from a Crypto Exchange?
You might also be interested in doing somewhat of the opposite of what I described in this post – buying stocks from a crypto exchange. This is still a new area in crypto, but there are already some exchanges that offer tokenized stocks that can be purchased with cryptos, as I describe in my post about that subject.
The biggest advantage, in that case, is that you can trade stock tokens 24/7 rather than being limited by the opening hours of the markets. This is especially useful if important news comes out during the weekend, or you invest through stock exchanges located in a different time zone to yours.
If you’re an investor who prefers owning Bitcoin, Ethereum, etc outright, then just head over to my list of best crypto exchanges and take action from there.
Investing in stocks, bonds, and ETFs involves risks including complete loss. Please do your research before making any investment.