Crypto ETNs: what they are, advantages, risks, and examples

Investors can gain exposure to the cryptocurrency market not only through the direct purchase of digital assets. One alternative instrument is the exchange-traded note, or ETN, interest which has grown significantly alongside the development of the institutional digital asset market.

For example, the cumulative return of one of Europe's largest Bitcoin ETNs in cryptocurrency — BTCE — has exceeded 900% since its launch in 2020, averaging around 55% per year even after accounting for the global correction in the digital asset market in 2021–2023.

What is an ETN in cryptocurrency?

An ETN (Exchange-Traded Note) in crypto is an exchange-traded debt security that tracks the performance of an underlying asset or index and is traded on a stock exchange. In the case of crypto ETNs, the underlying asset is a cryptocurrency such as Bitcoin (BTC), Ethereum (ETH), or Solana (SOL).

From a legal perspective, a cryptocurrency ETN represents an obligation by the issuer to pay the investor a return equivalent to the change in the price of the underlying cryptocurrency, minus trading and other fees.

Crypto ETNs are issued by specialized issuers, which are typically investment companies, funds, and other financial institutions. Some well-known issuers of ETNs in crypto include:

CoinShares;
21Shares;
VanEck;
WisdomTree;
Fidelity.

The ETN notes themselves are listed on regulated stock exchanges such as the London Stock Exchange or SIX Swiss Exchange and, like other securities, are assigned short ticker symbols, such as BTCE, ETPB, A21Z, and others.

How do crypto ETNs work?

When an investor buys shares of a crypto ETN on an exchange, they receive a note — a debt instrument under which the issuer promises to pay a return upon redemption. After an investment is made in an ETN, the issuer uses the funds raised to purchase digital assets, which are subsequently transferred to a regulated custodian*, such as BitGo or Coinbase Custody, for safekeeping until required.

* Custodian — a specialized organization that holds financial or digital assets in safekeeping and is responsible for their security. In the case of cryptocurrencies, a custodian provides secure storage of private keys, controls access to assets, and carries out transactions with them in accordance with established rules. Investment funds, issuers of exchange-traded products, and other institutional market participants often use custodian services.

The crypto ETN notes available for purchase are issued in advance by the issuer. These notes are strictly linked to the price of the cryptocurrency, although not necessarily on a one-to-one basis. For example, the price of one note may correspond to 0.01 BTC or another value determined by the crypto ETN issuer.

Investors can access crypto ETNs either directly through the stock exchange or via a separate brokerage account during trading sessions, just like ordinary securities.

At the same time, issuers are required to provide regular reports on their reserves, the value of which must be no less than the total value of all issued crypto ETNs. As a rule, ETNs in cryptocurrency are physically backed by cryptocurrency held in "cold" storage* by custodians.

* "Cold" storage — a method of storing cryptocurrency in which private keys are kept in an environment that is not permanently connected to the internet. Custodians may use hardware devices, isolated systems, or other secure infrastructure for this purpose. The absence of constant network access significantly reduces the risk of remote hacking and asset theft.

What are the differences between ETFs and ETNs in cryptocurrency?

A cryptocurrency ETN, like an ETF, is essentially a type of exchange-traded product (ETP). The main difference between an ETN and an ETF lies in what the investor actually purchases. In the case of a crypto-ETN, the investor acquires a debt security: the issuer undertakes to pay an amount that depends on changes in the price of the cryptocurrency. When purchasing an ETF, the investor receives a share in an investment fund that itself owns assets or tracks their value.

In addition, cryptocurrency ETNs carry higher counterparty risk, since, in the case of ETFs, client assets are generally legally protected from the issuer's bankruptcy.

Advantages and disadvantages of ETNs in cryptocurrency

The launch of products such as crypto ETNs makes digital assets more accessible to a broad range of investors. It therefore contributes to an inflow of liquidity into the cryptocurrency sector.

Thanks to instruments such as crypto-ETNs, Bitcoin and other cryptocurrencies are increasingly appearing on traditional exchanges and competing with conventional stock market assets.

In addition, an ETN in crypto serves as an additional tool for capital diversification without the need to directly manage an investment portfolio of coins and tokens.

However, crypto ETNs also have disadvantages. Although crypto ETNs simplify access to digital assets, they do not make investing in them any less risky. In other words, losses from falling cryptocurrency prices will also result in losses for holders of crypto ETNs.

In addition, investors have no legal protection when purchasing cryptocurrency ETNs. For example, in the United Kingdom, crypto ETNs are not covered by FSCS* rules, meaning that investors would not be entitled to compensation and could lose all their capital if the issuer goes bankrupt.

* FSCS (Financial Services Compensation Scheme) — the UK compensation scheme for customers of financial institutions in cases where a regulated company ceases operations and is unable to meet its obligations to clients. The FSCS applies only to certain financial products and services and only when the relevant eligibility conditions are met.

Another disadvantage of ETNs in cryptocurrency is the fees issuers and brokers charge holders of exchange-traded notes. As a rule, these fees are noticeably higher than those of similar instruments, such as ETFs.

ETNs in crypto vs. direct cryptocurrency storage

Unlike the direct purchase of digital assets, a crypto ETN provides exposure to Bitcoin and altcoins without the risks associated with storing private keys.

When purchasing securities, a crypto ETN investor does not become the owner of the digital asset. The investor receives a debt instrument backed by cryptocurrency held by a regulated custodian responsible for the security of the assets.

However, this introduces counterparty risk: an investor in a crypto ETN may lose their assets if the company that issued the exchange-traded notes is hacked or goes bankrupt. In the case of non-custodial (personal) storage of crypto assets, such a scenario would not be possible.

Examples of crypto ETNs currently available on the market

COINXBT

Bitcoin Tracker One (COINXBT) from provider XBT Provider is one of the most popular crypto ETNs, with total assets exceeding $4 billion.

XBT Provider has also launched a crypto-based ETN based on the leading altcoin, Ethereum — Ethereum Tracker One (COINETH). COINETH's assets are estimated at more than $2.5 billion.

Crypto ETNs from VanEck

Another well-known investment company, VanEck, has launched two products: Bitcoin ETN and Ethereum ETN. Both crypto ETNs are available through ordinary brokers. At the same time, the cryptocurrencies themselves are held in a modern "cold" storage facility operated by Bank Frick & Co. AG, eliminating the risk of remote hacking.

VanEck's cryptocurrency ETNs also provide limited asset insurance coverage. In addition, VanEck offers index-based crypto ETNs covering several cryptocurrencies:

Crypto Leaders ETN — exchange-traded notes covering ten of the most liquid crypto assets;
Smart Contract Leaders ETN — exchange-traded notes covering the most liquid assets whose platforms are based on smart contracts.