No Bitcoin ETF for Europe, but EU still leads in diversified crypto investments

The long-awaited approval from the United States Securities and Exchange Commission has finally arrived, allowing for the trading of spot Bitcoin (BTC) exchange-traded funds (ETFs) on American stock exchanges after years of anticipation and over 20 rejected applications.

Unlike previous Bitcoin futures ETFs, which only tracked the performance of Bitcoin futures contracts and did not hold any real Bitcoin, these newly approved spot ETFs directly purchase and hold the world’s leading cryptocurrency, offering a one-to-one tracking of its price.

This development offers both institutional and retail investors a regulated and convenient way to gain exposure to Bitcoin without the complexities of purchasing and storing it themselves. As these ETFs are regulated products, they are subject to SEC oversight and adhere to the same rules and codes of conduct as other investment funds and fund managers.

While this approval marks a significant step forward for Bitcoin ETFs in the United States, the question remains: what about Europe? Will financial regulators in the European Union follow suit, or will EU investors have to wait longer for the same opportunity?

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The landscape of accessing Bitcoin and other cryptocurrencies in Europe can be complex for investors. While platforms like Bison, Bitpanda, and eToro offer convenient entry points, they may not be suitable for larger or traditional investors due to strict regulations. The Undertakings for Collective Investment in Transferable Securities (UCITS) directive prohibits ETFs that exclusively invest in Bitcoin, in order to protect investors from total financial losses.

As a result, European investors must turn to alternative products, such as Bitcoin exchange-traded notes (ETNs), which are similar to ETFs and often backed by physical Bitcoin. Companies like 21Shares, VanEck, ETC Group, and Deutsche Digital Assets (DDA) offer these ETNs as an alternative investment option.

According to Dominik Poiger, chief product officer of Deutsche Digital Assets GmbH, ETNs have the advantage of being easily traded on popular exchanges like Deutsche Börse’s Xetra, Euronext Amsterdam, and SIX Swiss Exchange. Additionally, investors are already familiar with the concept of exchange-traded products, making them a convenient option for portfolio diversification.

However, it’s important to note that ETNs do not have the same legal protection as ETFs. In the event of an issuer’s insolvency, customer funds may not be separated from the bankruptcy estate. To address this concern, providers have implemented multiple security measures, including using regulated crypto custodians and independent security trustees.

According to Ophelia Snyder, co-founder and president of 21Share, the differences between ETFs and ETNs are negligible as long as the product structure is appropriate. For example, 21Shares’ ETPs reduce the potential default risk by depositing collateralized assets with an independent custodian.

European investors have the option to buy and sell crypto-asset ETNs on the secondary market, similar to shares or ETFs. Additionally, institutional investors can access special Alternative Investment Funds (AIFs) which can invest directly in cryptocurrencies, such as the HAIC Crypto Native Advanced Select fund from Hauck Aufhäuser Lampe Privatbank AG. However, these funds are only accessible to institutional investors and are not a viable option for retail clients.

Will the European Union approve Bitcoin ETFs in the future?

Poiger believes that the EU will not allow Bitcoin ETFs in their current form, as stated by relevant directives that do not include crypto-assets as eligible for UCITS. Even if regulations were to change, UCITS funds would still have to adhere to diversification rules.

Simon Seiter, head of digital assets at Hauck Aufhäuser Lampe, stated that a crypto ETF based on an index of multiple cryptocurrencies could be possible if recognized indexes meet UCITS requirements. These indexes could serve as the basis for the ETF, similar to how equity indexes are chosen for traditional stock ETFs.

Seiter also believes that if UCITS funds were to allow for single-asset ETFs, it would extend beyond the crypto sector. If crypto ETFs were to comply with UCITS requirements, there could be a market for these products, allowing retail clients to invest in a diversified manner while still using their existing custody structures.

Europe leads in diverse investment options for crypto assets

Poiger asserts that cryptocurrencies, particularly Bitcoin, are becoming a prominent investment class, as evidenced by the recent launch of a Bitcoin ETF in the United States.

As the demand for diversification grows, crypto assets will become an essential component for investors. Our analysis shows that adding Bitcoin to a traditional portfolio (0.5%–2%) has a positive impact on risk-return profile, including volatility, Sharpe ratio, and maximum drawdown, while also improving performance.

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In Europe, there are already numerous avenues for investing in Bitcoin and other cryptocurrencies, according to Snyder. Therefore, EU investors do not need to worry about the absence of a Bitcoin ETF.

21Shares alone offers approximately 40 products in eight EU countries, including indexes, single asset products, liquid staking products, and shorts, all fully backed by physical spot crypto assets.

These products are also listed on exchanges like SIX and Xetra in multiple currencies. Snyder notes that Europe is ahead of the U.S. in providing regulated access to crypto for both retail and institutional investors through ETNs/ETFs. There is a strong demand for cryptocurrencies in Europe, as investors continue to recognize their value and potential.

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