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Recently listed Bitcoin and Ethereum exchange-traded products (ETPs) are failing to attract significant inflows but the market isn't surprised nor worried.
In May, the London Stock Exchange (LSE) approved the listing of the first-ever cryptocurrency ETPs. ETPs are financial instruments that track the underlying price of an asset, such as a commodity or security. In this case, the newly approved ETPs will track the price of Bitcoin (BTC) and Ethereum (ETH), allowing investors to gain exposure to these cryptocurrencies through a familiar investment vehicle traded on the stock exchange.
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New York-based asset manager WisdomTree received approval for its WisdomTree Physical Bitcoin (BTCW) and WisdomTree Physical Ethereum (ETHW) ETPs, and the FCA also approved prospectuses from 21Shares and Invesco for crypto ETPs.
However, since their launch on 28 May, the products have failed to attract inflows due to institutional demand.
“Pretty simple really. The LSE is very late to the party,” HANetf co-founder and co-CEO Hector McNeil said.
The UK's Financial Conduct Authority (FCA) also restricts the products to institutions, preventing retail customers from investing in them. It also placed a ban on the sale of crypto derivatives and Exchange Traded Notes (ETNs).
“FCA retail ban means no local retail interest to underpin volumes either. Hopefully, it’s a foot in the door with the FCA and they change their approach to be more consistent with ‘complex ETPs’ like leverage ETPs where sophisticated retail can get access. If they did this it would create a deeper and healthy local market,” McNeil added.
Laurent Kssis, an independent board member of Issuance Swiss AG, said there is simply a lack of institutional demand for the products in the UK.
“There may still be a lack of widespread UK institutional adoption and demand for crypto ETNs, which could limit trading activity,” said Kssis.
Additionally, regulatory uncertainty in the UK is proving to be a deterrent. “The regulatory landscape surrounding cryptocurrencies and crypto-related investment products can be complex and evolving. Regulatory uncertainties or concerns about potential changes in regulations may deter some investors from actively trading crypto ETNs, leading to lower liquidity and trading volumes,” said Kssis.
Furthermore, competition from Germany, Switzerland, and France, leaves the UK in a vulnerable position.
“Competition from existing EU — investors have already gained exposure to cryptocurrencies through other investment vehicles, such as spot trading, futures contracts, or directly holding the underlying digital assets,” said Kssis.
Weak market maker support is another factor too, said Kssis, "Sufficient market maker support is crucial for ensuring liquidity and efficient trading in financial products. We currently have one market maker and a handful of authorized participants."
Hong Kong crypto ETFs met a similar fate too after its regulator greenlit the products. Debuting on 30 April, Hong Kong's crypto ETFs hit the market with a rather lackluster start, reeling in just $12 million in trading volume, inflows paled in comparison to the US market's $4.6 billion first day of Bitcoin ETFs.
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