Extraordinary growth in a brand new ETP market

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Bradley Duke, ETC Group

BTCE by ETC Group | The Editor’s Award - It was ETC Group’s Physical Bitcoin ETP (DE000A27Z304), BTCE’s growth of 34,259 per cent from launch on 8th June 2020 to 1st June 2021 that earned its first glance for the Editor’s Award this year, but the product is also distinguished by being the most liquid, 100 per cent physically backed bitcoin ETP in the world.

Bradley Duke, founder and co-CEO of ETC Group, explains that BTCE was the first crypto product to get approval from the German regulator BaFin, and the first centrally cleared crypto-backed listed product globally.

“It has been groundbreaking from the time we listed,” Duke says. “It really confirmed that the market was recognising that the product is a good and well-structured product. We knew that this product would be popular with retail investors, (outside the UK, where these products are banned for retail) but we also wanted to be certain the product was institutional grade.”

The firm structured BTCE with an eye for the concerns and questions that an investment committee would have and did a great deal of work on the trading itself with market makers and liquidity providers.

“The product is fully fungible with the underlying,” Duke explains. “If you hold the security, you can get bitcoin if you want it and that is not always the case with other products. The structure means that the tracking error is very low so lots of our investors see BTCE as a regulated form of bitcoin.”

The low tracking error means that some investors use it in a different way from long holders of bitcoin, in a cash and carry trade for instance, where traders use BTCE to go long bitcoin, while simultaneously shorting the bitcoin future.

“When we conceived the product, we dreamed it would be a source of discovery for the price of bitcoin,” Duke says, noting that bitcoin is traded on hundreds if not thousands of exchanges around the world in a very fragmented market that means the 10 authorised participants for BTCE could be sourcing bitcoin from different places with different ideas of value.

“You end up with a reflection of what the price of bitcoin is in an average of where all these market makers are seeing fair value,” he says.

At its peak, BTCE, distributed by HANetf in Europe, reached USD1.7 billion in assets and since the bitcoin price fall of late 2021 and early 2022, assets now stand at USD700 million.

Investor interest in BTCE has come from the institutional investment community in its broadest definition, from sovereign wealth, to hedge funds, to pension funds and private banks.

Macro-economics are BTCE’s friend with central banks raising interest rates making the idea of bitcoin as a hard currency a narrative that holds true, even with its volatility, Duke says.

Being able to pay in bitcoin is also becoming easier which makes countries with undeveloped banking systems or failed states more likely to use it. “There is a social upliftment story here,” Duke says.

Looking forward, ETC Group is moving towards asset management type products, offering exposure to an index or a basket or yields.

“We have a unique product structure. We are the only one with an independent administrator with veto power on operational transactions and the crypto assets that back the ETPs are 100 per cent unencumbered – we are not using them to achieve additional yields. We have to over engineer to maintain the integrity and security of the products.” 

 

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Beverly Chandler
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Managing Editor