In today’s newsletter, Morgan Stanley Investment Management’s Sarah Cummings provides insights and considerations when evaluating cryptocurrency exchange-traded funds.
Then, on Ask the Expert, Ryan Tannahill from iA Private Wealth USA answers questions about borrowing against Bitcoin assets.
Evaluating Cryptocurrency ETPs in a Changing Market
When evaluating exchange-traded funds (ETFs), investors often focus on factors such as fees, liquidity and tracking. Spot Bitcoin exchange-traded products (ETPs) introduce an additional dimension of due diligence that investors may not be accustomed to evaluating. The instruments, first launched in January 2024, are structured as grantor trusts under the 1933 Act and are designed to track Bitcoin Performance using specified pricing baseline. Understanding how their structure, hosting arrangements and benchmarks work is critical to evaluating these products.
Core ETF Considerations
As with any ETF, overall costs and trading characteristics are important.
Fees and Waivers. Although fees have compressed since the first spot Bitcoin ETPs entered the market, there are still significant differences in expense ratios across products. Investors may want to distinguish between gross and net expense ratios, especially if fee waivers are in place. Such exemptions may be subject to asset thresholds or maturity dates that may affect costs over time.
Liquidity and execution. Trading volume, bid-ask spreads and overall fund liquidity remain important inputs when assessing total cost of ownership. However, since Bitcoin itself is a highly liquid underlying asset, the liquidity on the screen may not fully reflect execution quality. In practice, similar execution prices across products are achievable despite differences in visible trading activity. Engaging with a trust sponsor or liquidity provider prior to trading may 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 often the primary driver, with products with lower expenses generally expected to track more closely over time. Physical creation and redemption mechanisms can also support tighter tracking by reducing frictional costs.
Specific Considerations for Cryptocurrency ETPs
In addition to traditional ETF metrics, there are several factors that are more specific to cryptocurrency-based products.
Digital asset custody. Holding Bitcoin requires specialized custody arrangements, which is a relatively new feature in asset services. While early infrastructure was largely developed by cryptocurrency-native companies, traditional custodians are increasingly entering the space. Custody practices, regulatory status and bankruptcy protection may vary between providers, so care needs to be taken to understand how and where digital assets are held.
Sponsor Profile. The issuer’s background is also worth considering. Cryptocurrency native originators and traditional financial institutions may operate under different regulatory frameworks and governance standards, which may impact risk management, operations and investor protection.
Benchmark method. The growth of digital asset products has led to the emergence of new benchmark providers. The construction of assessment benchmarks (such as exchange inclusion criteria, pricing methodologies and review processes) may be important. A poorly designed benchmark can skew the broader Bitcoin pricing, potentially affecting tracking results.
put it together
In developing asset classes, the structure and design of an ETP can be as important as the exposure it seeks to provide. In addition to overall fees, evaluating the custody framework, sponsor profile, benchmark methodology and execution characteristics may help investors better understand potential costs and risks. As the cryptocurrency ETP market continues to evolve, a rigorous and comprehensive due diligence process remains critical.
-Sarah Cummings, executive director, ETF strategist, Morgan Stanley Investment Management
Important Risks and Disclosures.
Ask the experts
Q: Do I need to transfer my Bitcoin to get a loan?
In many cases, yes – centralized lenders often require your Bitcoins to be held for the duration of the loan. However, different platforms have different structures, so it is necessary to understand who holds your assets and how to protect them before committing.
Q: What are the key risks advisors should address?
Margin call. If Bitcoin falls significantly, customers may be forced to post additional collateral or face liquidation—often at the worst possible time. Such a forced sale may also trigger a taxable event that exacerbates losses.
Q: Should I do this instead of selling part of my position?
It depends on belief. If you believe Bitcoin will appreciate in value, borrowing and lending can preserve that upside while meeting liquidity needs. But if you’re unsure about a position, adding leverage isn’t the answer – sometimes a clean sale is the simpler move.
– Ryan Tannahill, iA Privabecoming Investment Advisor Representative
Continue reading
- The U.S. Senate Banking Committee on Thursday sent its cryptocurrency market structure bill, the Clarity Act, to the Senate floor for consideration, moving it one step closer to being passed into law.
- The Japan Financial Services Agency recognizes foreign-issued stablecoins as electronic payment methods in accordance with domestic law, effective from June 1.
- Sarah Breeden, deputy governor of the Bank of England, said the Bank of England will publish draft stablecoin rules next month and finalize them before the end of the year.
