In Focus: Passive Investing  

Q&A: What ETPs can bring to crypto investment

Q&A: What ETPs can bring to crypto investment

The world of cryptocurrencies has become increasingly popular in recent months among investors as an alternative form of investment.

With this, has come the rising popularity of exchange-traded funds, more specifically exchange traded products (ETPs), which includes the existing crypto products.

ETPs are a wrapper designed to give investors the ability to gain exposure within specific areas in the market using a vehicle listed on the stock market.

They have the ability to track different assets across a number of sectors. 

Alice Liu, senior associate of cryptocurrency investments at WisdomTree, talks to FTAdviser in Focus about what ETPs can bring to crypto investment and the rising trend of these products.

She explains what sort of developments the industry could see over the next few years and how regulation can play a part. 

FTAdviser: Can you explain the trend towards using ETPs as a vehicle for esoteric investments?

Alice Liu: We have been monitoring the global inflows into crypto exchange-traded products and seen this space achieving significant growth and traction since Q2 2021.

The cumulative flows for global crypto ETPs now stand at around $5bn, up from virtually nothing one or two years ago. 

As investors have shown interest in investing in crypto assets, ETPs represent a good route-to-market option allowing for convenient and safe access to this asset class. 

Most crypto asset ETPs give investors institutional-grade trading and custody services, addressing investor concerns such as hacking or theft of the private keys, or not being able to access liquidity across various crypto exchanges. Most importantly, crypto ETPs can seamlessly plug in to existing trading and brokerage platforms. 

FTA: How comfortable will regulators and investors be with crypto ETPs?

AL: If we decouple the underlying crypto assets with the product structure here, and analyse this separately, it could help in drawing out the most productive conclusions. 

Regulators are generally comfortable with the ETP structure, and there is a sense of agreement that, as a regulated product, ETPs would provide better protection to investors when compared with direct trading on unregulated crypto exchanges. 

FTA: What sort of product development might we see in these areas over the next few years?

AL: We can look at how commodities were first brought into the ETP structure, as a guide to what we might expect to see from a product development standpoint in future.

We have seen products created on single commodities backed by both physically held commodities, like gold and silver, and futures, taking either long or short positions. Then there were index solutions launched, both on broad commodities as well as tailored baskets. 

In more recent years, we have seen enhanced strategies such as smart rolling, products with ESG overlays, etc.