In today’s newsletter, Sarah Cummings of Morgan Stanley Investment Management provides insights and considerations when evaluating crypto exchange-traded funds.
Then, in “Ask an Expert,” Ryan Tannahill of iA Private Wealth USA answers questions about loans against bitcoin assets.
Valuing crypto ETPs in an evolving market
When evaluating exchange-traded funds (ETFs), investors typically focus on factors such as fees, liquidity and tracking. Spot bitcoin exchange-traded products (ETPs) introduce additional dimensions of due diligence that investors may be less accustomed to evaluating. First launched in January 2024, these vehicles – structured as endowment funds under the 1933 Act – seek to track bitcoin performance using a designated price benchmark. Understanding how their structure, custody arrangements and benchmarks work is central to evaluating these products.
Core ETF Considerations
As with any ETF, headline costs and trading characteristics matter.
Fees and exemptions. Although fee compression has occurred since the first spot bitcoin ETPs entered the market, expense ratios still vary significantly across products. Investors may wish to distinguish between gross and net expense ratios, particularly where fee waivers are in place. Such waivers may be subject to asset thresholds or expiration dates that may affect costs over time.
Liquidity and execution. Trading volume, bid/ask spreads and total fund liquidity remain important inputs when assessing total cost of ownership. However, because bitcoin itself is a highly liquid underlying asset, the fund’s liquidity may not fully reflect execution quality. In practice, similarly priced execution may be achievable across products despite differences in visible trading activity. Engaging with a trust sponsor or liquidity provider in advance of a trade can help manage execution costs.
Tracking and fund design. Given their single-asset passive structure, spot bitcoin ETPs tend to exhibit limited sources of tracking error. Expense ratio is typically the primary driver, with lower fee products generally expected to follow more closely over time. In-kind creation and redemption mechanisms can also support tighter tracking by reducing frictional costs.
Considerations specific to crypto ETPs
In addition to traditional ETF metrics, several factors are more specific to crypto-based products.
Digital active repository. Holding bitcoin requires specialized custody arrangements, a relatively new feature in asset servicing. While the early infrastructure was largely developed by crypto-native firms, traditional custodians have increasingly entered the space. Custody practices, regulatory status and bankruptcy protection can vary across providers, making it wise to understand how and where digital assets are held.
Sponsor profile. The issuer’s background may also warrant consideration. Cryptonative sponsors and traditional financial institutions may operate under different regulatory frameworks and governance standards, which may affect risk management, operations and investor protection.
Benchmark method. The growth of digital asset products has led to the emergence of new benchmark providers. It may be important to evaluate a benchmark’s construction – such as exchange inclusion criteria, pricing methods and audit processes. A poorly designed benchmark can diverge from broader bitcoin pricing, potentially affecting tracking results.
Bringing it together
In an evolving asset class, the structure and design of an ETP can be as consequential as the exposure it seeks to provide. In addition to headline fees, evaluating custody frameworks, sponsor profiles, benchmark methods and execution characteristics can help investors better understand potential costs and risks. As the market for crypto ETPs continues to evolve, a disciplined and holistic due diligence process remains important.
– Sarah Cummings, Managing Director, ETF Strategist, Morgan Stanley Investment Management
Important risks and information.
Ask an expert
Question: Do I need to move my bitcoin to get a loan against it?
In many cases, yes – centralized lenders typically require custody of your bitcoin for the duration of the loan. However, structures vary across platforms, so it’s worth understanding who holds your assets and how they’re protected before you commit.
Q: What are the most important risk advisors should highlight?
Margin call. If bitcoin falls sharply, customers may be forced to post additional collateral or face liquidation — often at the worst possible time. The forced sale may also trigger a taxable event, exacerbating the loss.
Question: Should I do this instead of selling some of my position?
It depends on belief. If you think bitcoin is appreciating, borrowing preserves that upside while meeting liquidity needs. But if you’re unsure about the position, adding leverage isn’t the answer – sometimes a straight sell is the easier move.
– Ryan Tannahill, Investment Advisor Representative, iA Privabecoming
Continue reading
- The US Senate Banking Committee advanced its crypto market structure bill, the Clarity Act, to the Senate floor on Thursday, bringing it one step closer to passing it into law.
- Japan’s Financial Services Agency recognizes foreign-issued stablecoins as electronic payment methods under national law effective June 1.
- Bank of England Deputy Governor Sarah Breeden says the BoE will publish draft stablecoin rules next month and finalize them by the end of the year.
