ETP

An exchange-traded product (ETP) is a financial instrument that tracks the performance or value of an underlying asset, such as gold, a cryptocurrency token, or a commodity.

What Is a Crypto ETP?

In the context of crypto, exchange-traded products (ETPs track the price movements of an underlying cryptocurrency asset. They offer investors exposure to the underlying crypto without having to hold the crypto itself. Similar to shares and stocks, you can buy, sell, and trade cryptocurrency ETPs through brokers or traditional securities and stock exchanges.

ETP is an umbrella term, encompassing three main types of exchange-traded investment products:

• Exchange-traded funds (ETFs) – Cryptocurrency ETFs are investments that track or mirror the performance of a basket of digital assets, such as Bitcoin or Ethereum.
• Exchange-traded cryptocurrencies/commodities (ETCs) – ETCs typically provide direct exposure to cryptocurrency assets, such as Bitcoin, or physical commodities like gold and copper.
• Exchange-traded notes (ETNs) – Traditionally, ETNs are unsecured debt securities tracking stocks, bonds, and indices. They are similar to credit notes that banks issue to investors.

How do they work?

Generally speaking, ETPs aim to replicate the returns of an underlying crypto asset. To achieve this, an ETP can employ one of two main replication techniques – physical or synthetic methods.

In physical replication, the physical ETP purchases and holds the underlying cryptocurrency in a secure wallet. The performance of the physical crypto ETP then becomes intrinsically tied to the performance of the underlying cryptocurrency it tracks. Popular examples of physical crypto ETPs are the Fidelity Physical Bitcoin (FBTC) and 21Shares Bitcoin (ABTC).

On the other hand, synthetic ETPs utilize swap counterparties, typically a financial institution like a bank, to pay out the returns associated with the underlying crypto. To guarantee daily return delivery, the swap counterparty is often obligated to deposit collateral with the issuer  – especially in blue-chip assets or treasuries. In addition, the required collateral amount often fluctuates in response to the performance of the cryptocurrency being tracked.

Physical ETPs are more transparent, eliminate counterparty risks, and are relatively simple. However, while synthetic ETPs are more complex, they come in handy in certain situations, such as when the underlying asset is costly to physically replicate.

In summary, when you purchase a crypto ETP, you get exposure to a digital asset through a traditional financial instrument that functions like a bond or stock. This is more convenient for some investors, though it comes without the benefits of secure crypto self-custody.