Bitcoin ETP trading surges to levels seen by most popular ETFs

Trading volumes for the world’s first centrally cleared bitcoin exchange traded product have surged to levels usually only seen by the most popular European ETFs.

Average daily order book turnover for the BTCetc Bitcoin Exchange Traded Crypto (BTCE) on the Deutsche Börse hit €57m in the first 11 days of January, data from the German exchange shows.

This was just €1m behind the most traded exchange traded product on Deutsche Börse, the iShares Global Clean Energy Ucits ETF (INRG), and way ahead of volumes for any of the other 1,800 ETPs listed on the Frankfurt exchange.

The trading surge — a sharp pick up on the €15.5m daily average in December, the previous record — comes following a tenfold rise in the price of Bitcoin since March to a peak of $42,000 earlier this month, before handing back some gains.

Stephan Kraus, head of Deutsche Börse’s ETF segment, said that the structure of the BTCE exchange traded note, which eased the regulatory concerns and counterparty risk involved in trading bitcoin, had “increased the appeal of cryptocurrency investments for institutional investors”, which can trade without needing to set up digital wallet infrastructure or use an “unregulated crypto platform”.

Deutsche Börse’s trading data show a number of trades above €30,000 or so, which it believed were unlikely to be from day traders or other retail investors.

Bradley Duke, co-founder and chief executive of ETC Group, the issuer of BTCE, also believed institutional investors were starting to buy the cryptocurrency as a “safe haven”.

“Bitcoin has always had a retail groundswell, people who have an interest in technology, and it was seen as a wild west investment. That has really changed in the last six months,” he said.

“Coronavirus has played a part in that. It’s starting to look like an attractive alternative to currencies that may be devalued by the stimulus packages. The packages are needed but there are real concerns they may set inflationary forces in play.

“We believe that institutions are getting involved properly in taking part of their portfolio as bitcoin as a hedge against the devaluation of major currencies.”

BTCE, which has $433m of assets and a total expense ratio of 2 per cent, is physically backed by bitcoin. These are stored with BitGo Trust, a digital asset trust company based in Palo Alto, California.

On Wednesday, ETC listed similar ETNs denominated in dollars, sterling and Swiss francs on SIX, the Swiss exchange, with Mr Duke saying more products would be launched “in the next few weeks”, based on other cryptocurrencies and a basket of cryptos.

Continental Europe has seen a flurry of similar launches, with VanEck and 21Shares also offering bitcoin ETNs on Deutsche Börse. The Swiss exchange now lists 34 crypto exchange traded products from six issuers.

However, the UK’s Financial Conduct Authority has banned the sale of cryptocurrency-related derivatives, including ETNs, to retail investors, saying the underlying assets had “no reliable basis for valuation”.

The FCA added this week that anyone investing in crypto assets “should be prepared to lose all their money”.

On Wednesday, Christine Lagarde, president of the European Central Bank, called for global regulation of cryptocurrencies to help combat their use in “totally reprehensible money laundering activity”.

For others, it is the often dramatic price swings exhibited by cryptocurrencies that will preclude widespread take-up by institutional investors.

“Given their high volatility and the size of their past drawdowns, cryptocurrencies might be attractive to speculative investors, but they are neither a suitable alternative to safe haven assets nor do they necessarily contribute to portfolio diversification,” strategists at UBS Asset Management said this week.