Digital Asset ETP Products

Originally, digital asset ETPs started as trackers for individual digital assets. Presently, the market offers a broader spectrum of digital asset ETPs, encompassing basket, staking, inverse, and leveraged products, along with specific indices tailored to handle volatility.

Regarding underlying assets, based on recent data compiled by ETFBook and BitMEX Research, and after excluding equity and OTC-traded funds while incorporating additional data, it is observed that among 162 digital asset ETPs, bitcoin, ethereum, and basket products constitute 58%. The remaining 42% comprises a diverse array, including single digital assets from the long tail, as well as short, volatility, and leverage products.

Among the 162 products, 121 fall under the category of ETPs, while 41 are specifically classified as ETFs. This ETF category further breaks down into 16 futures ETFs and 11 pending US spot bitcoin ETFs awaiting launch. Additionally, there are 14 staking products in total, comprising thirteen ETPs and one ETF. Staking products allow investors to capitalize on the staking yield generated by their holdings.

Out of the 14 leading digital asset ETPs by assets, nine are dedicated to tracking bitcoin, constituting 64% of the total. The remaining five encompass three ethereum trackers, one solana tracker, and one Binance coin tracker. Within the set of 14 products, Switzerland hosts four (all from the issuer 21Shares), Canada hosts three, Jersey hosts two, and there is one each domiciled in Germany, the US, and Liechtenstein. Among the top 14 products by assets, four are categorized as ETFs, consisting of three spot ETFs and one futures ETF. Among the ETPs, eight are physical products, while two are classified as synthetic.

Launching new digital asset ETPs comes with various considerations and constraints. These encompass adhering to regulatory and stock exchange stipulations, obtaining necessary approvals, meeting liquidity prerequisites, gauging investor demand, and ensuring access to public price data and fiat trading pairs. Despite these challenges, ongoing product innovation persists, driven by the entry of more participants into the market. Issuers and index providers are actively seeking to secure market share and set themselves apart. Simultaneously, the growing understanding and acceptance of this asset class among regulators, service providers, and investors contribute to the evolving landscape.

ETPs impose management fees, also known as expense ratios or sponsor fees, to cover the expenses associated with managing and operating the products. These fees are typically calculated annually as a percentage of the holdings and are deducted from the Net Asset Value (NAV) either on a daily basis or at regular intervals. In the early stages of crypto ETPs, some were able to charge relatively high fees, reaching up to 2.5%, whereas the usual range for ETP fees falls between 0.05% and 0.75%. The fact that certain crypto ETPs, despite charging 2.5% when alternatives offer fees as low as 0%, have accumulated significant Assets Under Management (AUM) underscores the stickiness and the advantage of being a first mover in this space.

Moving forward, fees are expected to be a pivotal point of differentiation for new products, as exemplified by the recent developments in the US spot ETF arena. Notably, Invesco/Galaxy announced a fee waiver for the initial six months and the first $5 billion in assets, while Fidelity proposed a fee of 0.39%. As of January 8th, announcements from other issuers affirm that a competitive landscape for fees is indeed emerging (see link for reference “Race to zero and impact of Terrordome : US spot bitcoin ETF frenzy continues”).

Asset managers who overlook ETF/ETPs with the notion that they exclusively cater to passive strategies are overlooking the essence of these investment vehicles. An ETF/ETPs serves as a distribution technology applicable to various investment styles or strategies. The momentum behind ETF growth persists due to robust regulatory, demographic, and structural factors. Projections suggest that the European ETF market will expand significantly, potentially tripling to $3 trillion by 2029. It’s evident that there exists a substantial fee opportunity for asset managers to capture, maintain, or forfeit.