In today’s newsletter, Sarah Cummings from Morgan Stanley Investment Management provides insights and considerations when assessing crypto exchange-traded funds.
Then, in “Ask an Expert,” Ryan Tannahill from iA Private Wealth USA, answers questions about borrowing against bitcoin assets.
Assessing Crypto ETPs in an Evolving Market
When evaluating exchange‑traded funds (ETFs), investors typically focus on factors such as fees, liquidity and tracking. Spot bitcoin exchange‑traded products (ETPs) introduce additional dimensions of due diligence that investors may be less accustomed to assessing. First launched in January 2024, these vehicles — structured as grantor trusts under the 1933 Act — seek to track bitcoin performance using a designated pricing benchmark. Understanding how their structure, custody arrangements and benchmarks operate is central to evaluating these products.
Core ETF considerations
As with any ETF, headline costs and trading characteristics matter.
Fees and waivers. While fee compression has occurred since the first spot bitcoin ETPs entered the market, expense ratios still vary meaningfully across products. Investors may wish to distinguish between gross and net expense ratios, particularly where fee waivers are in place. Such waivers may be subject to asset thresholds or expiration dates that could affect costs over time.
Liquidity and execution. Trading volume, bid/ask spreads, and overall fund liquidity remain important inputs when assessing the total cost of ownership. However, because bitcoin itself is a highly liquid underlying asset, onscreen fund liquidity may not fully reflect execution quality. In practice, similarly priced execution may be achievable across products despite differences in visible trading activity. Engaging with a trust sponsor or liquidity provider ahead of a trade 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 ratios are typically the primary driver, with lower‑fee products generally expected to track more closely over time. In‑kind creation and redemption mechanisms may also support tighter tracking by reducing frictional costs.
Considerations specific to crypto ETPs
Beyond traditional ETF metrics, several factors are more specific to crypto‑based products.
Digital asset custody. Holding bitcoin requires specialized custody arrangements, a relatively new function within asset servicing. While early infrastructure was largely developed by crypto‑native firms, traditional custodians have increasingly entered the space. Custody practices, regulatory status and bankruptcy protections can differ across providers, making it prudent to understand how and where digital assets are held.
Sponsor profile. The issuer’s background may also warrant consideration. Crypto‑native sponsors and traditional financial institutions may operate under different regulatory frameworks and governance standards, which can influence risk management, operations and investor protections.
Benchmark methodology. The growth of digital asset products has led to the emergence of new benchmark providers. Evaluating a benchmark’s construction—such as exchange inclusion criteria, pricing methodologies and review processes—can be important. A poorly designed benchmark may diverge from broader bitcoin pricing, potentially affecting tracking outcomes.
Bringing it together
In a developing asset class, the structure and design of an ETP can be as consequential as the exposure it seeks to provide. Beyond headline fees, evaluating custody frameworks, sponsor profiles, benchmark methodologies and execution characteristics may help investors better understand potential costs and risks. As the market for crypto ETPs continues to evolve, a disciplined and holistic due diligence process remains essential.
– Sarah Cummings, executive director, ETF Strategist, Morgan Stanley Investment Management
Important risks and disclosures.
Ask an Expert
Q: Do I need to move my bitcoin to get a loan against it?
In many cases, yes — centralized lenders typically require custody of your bitcoin for the loan’s duration. However, structures vary across platforms, so it’s worth understanding who holds your assets and how they’re protected before committing.
Q: What’s the main risk advisors should flag?
Margin calls. If bitcoin drops sharply, clients may be forced to post additional collateral or face liquidation — often at the worst time. That forced sale can also trigger a taxable event, compounding the loss.
Q: Should I do this instead of selling some of my position?
It depends on conviction. If you believe bitcoin appreciates, borrowing preserves that upside while meeting liquidity needs. But if you’re uncertain about the position, adding leverage isn’t the answer — sometimes a clean sale is the simpler move.
– Ryan Tannahill, Investment Advisor Representative, iA Privabecoming
Keep Reading
- The U.S. Senate Banking Committee advanced its crypto market structure bill, the Clarity Act, to the Senate floor on Thursday, bringing it a step closer to passing it into law.
- Japan’s Financial Services Agency recognizes foreign-issued stablecoins as electronic p.yment methods under domestic law, effective June 1.
- Bank of England Deputy Governor Sarah Breeden says the BoE will publish draft stablecoin rules next month and finalize them by year-end.
