With cryptocurrencies making their way into the mainstream, more investors are using them to diversify their portfolios. Yet the high volatility of cryptocurrencies has made many investors skeptical, if not afraid, of investing their hard-earned money.
Enter crypto ETNs, an exchange-traded product used in the traditional finance world for years. Now, they present investors with a unique opportunity to invest indirectly in cryptocurrencies without scaling the steep learning curve of cryptocurrency.
So, what exactly are crypto ETNs, what are their benefits and risks, and are there any good ETN examples?
Cryptocurrency Exchange-Traded Notes (ETNs) are financial products that track the price of a particular cryptocurrency, such as Bitcoin, Ethereum, or Solana. An ETN issuer, which is usually a financial institution, promises to pay an investor the return of the underlying cryptocurrency minus fees and other costs.
The financial institution does not have to buy the underlying cryptocurrency. Rather, they can invest it in whatever they want as long as, at the end of the investment period, they will pay the investor the pre-interest rate equivalent to the return achieved by the cryptocurrency.
Meanwhile, investors can trade ETNs on an ETN exchange, just like they would with cryptocurrency or stocks. This system allows anyone to invest in the cryptocurrency market without necessarily buying crypto.
ETNs and ETFs (Exchange-Traded Funds) have a close-knit relationship based on their resemblance to mutual funds with the added advantage of being tradable. However, there's one thing that distinguishes them.
While ETNs only represent a tax obligation with the issuer, ETFs hold the underlying cryptocurrencies and the companies involved in their development. Hence, an ETN provides exposure to the return of the underlying cryptocurrency, while an ETF provides exposure to the underlying cryptocurrency's performance.
Cryptocurrency exchange-traded notes (ETNs) offer several benefits, including:
- Convenience: ETNs provide a simple way to invest in cryptocurrency without buying. Therefore, you don't need to set up a wallet, manage your private keys, or worry about the security of your digital assets.
- Accessibility: ETNs are publicly traded and can be easily bought and sold through a brokerage account. You don't need to master the scope and functioning of cryptocurrencies or have the technical expertise and resources to invest.
- Diversification: ETNs provide exposure to specific indexes by simply promising to pay the index's return rather than investing in the cryptocurrency. This allows investors to diversify their portfolios and access new asset classes.
- Reduced Tracking Error: As the return of an ETN complements the return of the underlying cryptocurrency, it means you're getting a good match to a particular cryptocurrency index if that was your investment plan. This is unlike ETFs, where you must constantly rebalance portfolios to match the index, which could result in errors.
- Tax Benefits: Ideally, cryptocurrencies are taxed as property, with profits realized from buying, selling, or transferring crypto assets being taxed. ETNs are different; they are taxed as capital gains, resulting in lower tax bills. Additionally, in some jurisdictions, this type of long-term capital gains tax is usually less than the short-term capital gains tax payable on any interest made.
While ETNs seem like an easy go-to investment option, they are not without risks. They include:
- Defaulting: There's always a risk that the financial institution or issuer cannot pay back the returns or even the principal to the investor, despite how established they are. Crypto market volatility and issuer credit risk might cause payment defaults, resulting in losses.
- No claim to underlying assets: In most cases, investing in ETNs is like buying an unsecured bond. Your investment is not backed by any assets. You're only relying upon the creditworthiness of the issuer. A collateralized ETN would be a wiser option.
- Liquidity: Although ETNs are publicly traded, most don't have high trading volumes. Hence, selling your ETN to another trader might be difficult during low trading volumes or other market conditions.
While cryptocurrency ETNs and ETFs carry market risks, which means market changes impact your investment, ETNs carry an additional credit risk of the issuer being unable to meet their repayment obligations. Hence, ETNs are considered riskier than ETFs. Nonetheless, the overall risk level depends on the specific product, underlying assets, investment practices, and marketing conditions.
Cryptocurrency investment firms can create as many ETN products as they want from any of the cryptocurrencies on the market. But here are the top five Bitcoin ETNs.
This Bitcoin ETN is issued by VanEck, a global investment manager founded in 1955 to offer investment options. It offers a 100% collateralized ETN based on the MVIS Cryptocompare Bitcoin VWAP Close Index and closely tracks the Bitcoin price. It's available
for trading on secondary exchanges such as XETRA, SIX, and Euronext. Other VanEck ETNs available include Ethereum, Solana, TRON, and Avalanche.
ETC Group is a German-based crypto investment firm that offers ETC Group Physical Bitcoin, a fusion between an ETF and an ETN, backed by a collateralized underwritten note. The ETC Group Bitcoin ETN is issued in Germany under the German government's oversight and is listed in USD and available for trading on Aquis Exchange UK, Deutsche Börse XETRA, Euronext Amsterdam, and the SIX Swiss Exchange. Other ETNs offered by ETC Group include Ethereum, Litecoin, Solana, Polygon, XRP, Cardano, Avalanche, and Polkadot.
21Shares, a cryptocurrency-only investment firm, offers one of the largest collections of exchange-traded products (ETPs). Its Bitcoin ETN ranks highly in terms of portfolio performance. It is intended to allow investors to profit from bitcoin's volatility and can be traded globally in USD on Euronext Amsterdam and SIX Swiss Exchange. Other cryptocurrency ETNs offered by 21Shares include Binance BND, Ethereum, Polkadot, Algorand, Solana, Stellar, and XRP.
Coinshares is a London-based global digital asset investment firm founded in 2013. It established the first exchange-traded bitcoin product, Bitcoin Tracker One, which was listed on NASDAQ/OMX in Stockholm in 2015. Coinshares has a long record of regulated investment in digital assets, and their ETPs are physically backed. US citizens can trade ETNs through any of its 25 listed brokers. Other crypto ETNs offered by Coinshares include Ethereum, Litecoin, XRP, Polkadot, Tezos, Solana, and Chainlink, among others.
WisdomTree is a New York-based ETPs sponsor and asset manager. It offers the Wisdom Tree Bitcoin ETP, a product physically backed by Bitcoin listed with USD as the base currency on Euronext, SIX, XETRA, and the Frankfurt Stock Exchange. Investors from passported countries can invest directly in the product, while others have to use a broker, such as a bank. Other ETNs offered by WisdomTree include Ethereum, Cardano, Polkadot, and Solana.
As a unification of a relatively new decentralized finance technology and an old financial market concept, ETNs provide you with a unique opportunity to trade in cryptos.
However, it's important to carefully consider the risks before investing in cryptocurrency ETNs. As with all investments, research and consult a financial advisor before making huge investment decisions.