As the crypto ecosystem matures and more investors become knowledgeable about the investment case for crypto assets, one question we’ve heard more frequently is, “Why choose an ETP over holding crypto directly?”
While there are certainly some investors comfortable with holding their crypto directly on an exchange or wallet provider, most investors face a multitude of challenges associated with this approach. When investing directly, investors must navigate a complex landscape that involves selecting the right assets, dealing with unregulated service providers, and confronting counterparty risk. Unfortunately, history has shown that assets entrusted to exchanges are vulnerable to being frozen or hacked, underscoring the significant risks involved. Those who choose to self-custody their crypto assets face their own set of risks, such as the potential for forgetting private keys, theft, or accidental loss.
As a result of these risks, an increasing number of European investors are opting for exchange-traded products (ETPs) as their preferred avenue to gain exposure to the world of crypto. Professional investors in particular are increasingly drawn to the familiar structure of ETPs. This summer, a JP Morgan-sponsored survey found that professional investors are “increasingly ready to embrace cryptocurrency ETPs as part of their investment strategies” given that over a third of respondents prefer not to deal with the complexities of direct investing.
What to consider in a crypto ETP
We believe that ETPs are the best wrapper for most investors. This is especially true for those with fiduciary responsibilities because many do not have the capabilities or the manpower to handle private keys, conduct due diligence on custodians, market makers, or third-party platforms involved in the investment process for their end clients. There are many questions that should be asked when considering an ETP provider, such as:
What is the track record of the provider?
Who handles the custody of the crypto assets?
What protection do you have if they fail or are bankrupt?
How do they select investable crypto assets and what is their approach to assets with legal and reputational risks?
Who are the service providers involved in the product’s management?
The ETP structure significantly enhances operational efficiency and, most importantly, addresses the critical issue of custody. This approach mirrors the well-established structure of physical gold ETPs, which are widely embraced by European investors due to their time-tested reliability and high liquidity.
Hashdex ETPs are designed to provide diversified portfolios of crypto exposure, each regulated and traded on familiar and established investment platforms. There are several design features of our ETPs that are aimed specifically at professional investors. These include:
Diversified Indices: Hashdex ETPs are designed to track diversified indices, thoughtfully selected from independent and BMR-compliant index providers and administrators like Nasdaq, CF Benchmarks, and Vinter.
Collateralized Assets: All ETPs maintain 100% collateralization with the physical underlying crypto assets, achieved through partnerships with leading Collateral Agents, Fund Administrators, and Audit Firms.
Institutional-Grade Custody: Our ETPs prioritize security by entrusting regulated crypto custodians to safeguard assets in an air-gapped environment, away from internet vulnerabilities. These assets are insured against potential fraud and hacking incidents.
Listed on Regulated Exchanges: Hashdex ETPs are listed on well-regulated exchanges within Europe, fully compliant with local regulatory requirements, ensuring a secure and transparent trading environment.
Liquidity and Institutional Support: These ETPs offer daily liquidity and are supported by tier-one market makers and authorized participants, guaranteeing a seamless trading experience.
The Nasdaq Crypto Index Europe (NCIE), developed by Nasdaq in partnership with Hashdex, was created to provide this type of dynamic exposure to crypto. Our ETP that track the NCIE are built around an incredibly robust methodology we believe is a best-in-class approach. For any crypto asset to be part of the NCIE, it must meet very strict criteria:
What’s most important for investors to remember is that ETPs provide a secure and regulated means of accessing the crypto market. The familiar ETP structure mitigates many of the operational complexities and risks associated with direct crypto investments, making it a compelling choice for those looking to venture into this dynamic asset class.
In the current environment, we continue to believe that crypto is undervalued and has a strong appeal as a diversification tool and hedge against macro uncertainties. With this backdrop, a small allocation to crypto now may prove to have a significant impact on portfolios as conditions improve.
1 Trackinginsight Global ETF Survey 2023 Results, May 2023