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As cryptocurrencies make their way into the mainstream, more and more investors are using them to diversify their portfolios. However, the high volatility of cryptocurrencies has made many investors skeptical, if not afraid, to invest their hard-earned money.
Enter crypto ETNs, an exchange-traded product that has been used in traditional finance for years. Now, they offer investors a unique opportunity to invest indirectly in cryptocurrencies without scaling the cryptocurrency’s steep learning curve.
What exactly are crypto ETNs, what are their benefits and risks, and are there any good ETN examples?
What is a cryptocurrency ETN?
Cryptocurrency Exchange-Traded Notes (ETNs) are financial products that track the price of a specific cryptocurrency such as Bitcoin, Ethereum, or Solana. An ETN issuer, which is usually a financial institution, promises to pay an investor the rate of return on the underlying cryptocurrency, minus fees and other costs.
The financial institution does not need to purchase the underlying cryptocurrency. Rather, they can invest it in anything they want as long as they pay the investor the pre-interest rate equal to the return generated by the cryptocurrency at the end of the investment period.
In the meantime, investors can trade ETNs on an ETN exchange just like they would trade cryptocurrency or stocks. This system allows anyone to invest in the cryptocurrency market without necessarily buying crypto.
What is the difference between cryptocurrency ETNs and ETFs?
ETNs and ETFs (Exchange-Traded Funds) have a close relationship due to their similarity to mutual funds, with the added benefit of being tradable. However, there is one thing that makes them different.
While ETNs simply represent a tax liability to the issuer, ETFs hold the underlying cryptocurrencies and the companies involved in their development. Therefore, an ETN offers exposure to the returns of the underlying cryptocurrency, while an ETF offers exposure to the performance of the underlying cryptocurrency.
What are the advantages of cryptocurrency ETNs?
Cryptocurrency exchange-traded notes (ETNs) offer several benefits, including:
- Convenience: ETNs offer an easy way to invest in cryptocurrency without buying it. 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 workings of cryptocurrencies or have the technical expertise and resources to invest.
- Diversification: ETNs provide exposure to specific indices simply by promising to pay the index’s return rather than investing in the cryptocurrency. This allows investors to diversify their portfolios and gain access to new asset classes.
- Reduced tracking error: Because an ETN’s return complements the return of the underlying cryptocurrency, it means you’ll get a good match against a specific cryptocurrency index if that was your investment plan. This is unlike ETFs, which require you to constantly rebalance portfolios to match the index, which can lead to errors.
- tax benefits: Cryptocurrencies are ideally taxed as property, with profits from the purchase, sale or transfer of crypto assets being taxed. ETNs are different; They are taxed as capital gains, resulting in a lower tax burden. Additionally, in some jurisdictions, this type of long-term capital gains tax is typically lower than the short-term capital gains tax payable on interest income.
What are the risks of cryptocurrency ETNs?
Although ETNs may seem like an easy investment option, they are not without risks. They include:
- default: There is always a risk that the financial institution or issuer will not be able to return the returns or even the capital to the investor even though they are established. The volatility of the crypto market and the credit risk of the issuer can lead to payment defaults and thus losses.
- No entitlement to underlying values: In most cases, investing in ETNs is like buying an unsecured bond. Your investment is not backed by assets. They only rely on the creditworthiness of the issuer. A collateralized ETN would be a smarter option.
- liquidity: Although ETNs are publicly traded, most do not have high trading volume. Therefore, selling your ETN to another trader can be difficult in low trading volume or other market conditions.
Are cryptocurrency ETNs riskier than ETFs?
While cryptocurrency ETNs and ETFs involve market risk, meaning that market changes will affect your investment, ETNs carry an additional credit risk that the issuer may not be able to meet its repayment obligations. Therefore, ETNs are considered riskier than ETFs. However, the overall level of risk depends on the specific product, underlying assets, investment practices and marketing terms.
The top 5 cryptocurrency ETNs
Cryptocurrency investment firms can create any number of ETN products from any cryptocurrency on the market. But here are the top five Bitcoin ETNs.
1. VBTC VanEck Bitcoin ETN
This Bitcoin ETN is issued by VanEck, a global investment manager founded in 1955 to provide investment options. It offers a 100% collateralized ETN based on the MVIS Cryptocompare Bitcoin VWAP Close Index and closely tracks the Bitcoin price. it is available
for trading on secondary exchanges such as XETRA, SIX and Euronext. Other available VanEck ETNs are Ethereum, Solana, TRON and Avalanche.
2. ETC Group physical bitcoin
ETC Group is a Germany-based crypto investment firm offering ETC Group Physical Bitcoin, a merger between an ETF and an ETN, backed by a collateralized bond. The ETC Group Bitcoin ETN is issued in Germany under the supervision of the German Government and is listed in USD and is 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.
3. SBTC 21Shares Short Bitcoin ETP
21Shares, a cryptocurrency-only investment firm, offers one of the largest collections of exchange-traded products (ETPs). Its Bitcoin ETN ranks high in terms of portfolio performance. It is designed to allow investors to benefit from Bitcoin’s volatility and can be traded globally in USD on Euronext Amsterdam and SIX Swiss Exchange. Other cryptocurrency ETNs offered by 21Shares are Binance BND, Ethereum, Polkadot, Algorand, Solana, Stellar and XRP.
4. Bitcoin Tracker One XBT Provider (Coinshares)
Coinshares is a London-based global digital asset investment firm founded in 2013. She launched the first Bitcoin exchange-traded product, Bitcoin Tracker One, which was listed on NASDAQ/OMX in Stockholm in 2015. Coinshares has a long history of regulated investments in digital assets and their ETPs are physically backed. US residents can trade ETNs through any of the 25 listed brokers. Other crypto ETNs offered by Coinshares include Ethereum, Litecoin, XRP, Polkadot, Tezos, Solana, and Chainlink.
5. WisdomTree Bitcoin
WisdomTree is a New York-based ETP sponsor and fund manager. It offers the Wisdom Tree Bitcoin ETP, a product physically backed by Bitcoin and listed on Euronext, SIX, XETRA and the Frankfurt Stock Exchange with USD as the base currency. Investors from passport countries can invest in the product directly, while others have to use a broker like a bank. Other ETNs offered by WisdomTree include Ethereum, Cardano, Polkadot, and Solana.
Should you invest in crypto with an ETN?
A merger of a relatively new decentralized finance technology and an old concept of financial markets, ETNs offer you a unique opportunity to trade cryptos.
However, it is important to carefully consider the risks before investing in cryptocurrency ETNs. As with all investments, research and consult a financial advisor before making any major investment decisions.
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