Crypto ETNs vs. Crypto ETFs: Understanding the Differences
Cryptocurrency ETNs (Exchange Traded Notes) and ETFs (Exchange Traded Funds) are investment tools that allow you to capitalize on the price fluctuation of virtual assets. However, there are several important distinctions between them that investors should understand.
What is an ETF?
An ETF (Exchange Traded Fund) enables individual investors to invest in various assets without owning them directly. ETFs can be based on commodities, raw materials, debt, etc., and are traded on stock exchanges like traditional securities. Crypto ETFs fall into the currency category.
An ETF strictly invests your funds according to a predefined investment policy and only in assets aligned with that policy: stocks, bonds, commodities, or cryptocurrencies. The principle is straightforward: a Bitcoin ETF invests in Bitcoin, an Ethereum ETF invests in Ethereum, and so forth.
The security of the assets in the fund is guaranteed by storing them with an external trusted custodian, separate from the investment company's funds. This arrangement ensures that investors are protected in the event of the fund's bankruptcy.
For more information on how ETFs operate within the cryptocurrency market, check out our article on Bitcoin ETFs.
What is an ETN?
An ETN (Exchange Traded Note) is an unsecured debt obligation that tracks the price of an underlying asset. ETNs have a specified income payment date; however, the full repayment depends on the financial health of the issuer. ETN funds do not make regular interest payments but generate returns based solely on the performance of the underlying asset. In simple terms, if the price of gold does not increase over the year, your investment in a "gold" ETN will not yield any returns.
ETNs are similar to debt securities that an issuer (typically a bank or investment firm) provides to an investor.
For example, if you wish to invest in gold bars but find buying physical metal impractical, you might instead purchase a gold ETN. You would enter a contract with the issuer of the note, who commits to pay you the value of the gold at the contract's expiration, minus any commission.
How do crypto ETFs differ from crypto ETNs?
Both ETFs and ETNs are designed for investing in assets without direct acquisition. However, they differ in several key aspects:
1. Structure: ETNs are debt instruments issued by regulated entities, whereas ETFs are securities that trade on stock exchanges.
2. Collateral: ETNs are backed by the assets of the issuer, not directly by cryptocurrencies themselves. In contrast, ETFs invest directly in cryptocurrencies, which act as the fund's reserves.
3. Regulation: ETNs are subject to less stringent regulations than ETFs. In the event of issuer bankruptcy, ETN assets are liquidated. If an ETF faces issues, private or government insurance companies intervene, similar to bank deposit insurance, due to the banking-like licenses held by ETF issuers.
4. Accessibility for retail investors: ETNs are more accessible due to their lower entry barriers and are offered by many financial institutions and companies. ETFs, due to higher regulatory requirements, are better suited for institutional investors.
5. Risk types: ETN holders face credit risk associated with the issuer's ability to pay back the debt. ETF holders bear market risk linked to the volatility of the underlying cryptocurrencies.
6. Transparency: ETNs tend to be less transparent than ETFs, as investors might not have access to comprehensive information about the issuer’s reserves.
7. Taxation: For crypto ETN investors, tax events occur only upon selling the asset. ETF holders, however, pay taxes on income annually. However, ETFs offer the advantage of more frequent reinvestment of profits.
Which Companies Offer Crypto ETNs?
VanEck, an American investment management company, provides several cryptocurrency ETNs, including Bitcoin (VBTC), Ethereum (VEthereum), and Polkadot (VPolka). Serving US residents, VanEck manages $700 million in assets. These crypto ETNs were launched in January 2024.
21Shares, based in Germany, offers around 20 ETNs, covering cryptocurrencies like Bitcoin (CBTC), Ethereum (ETHC), Cardano (AADA), Bitcoin Cash (ABCH), and Solana (ASOL). Serving European customers, 21Shares has been in the market since 2018 and manages assets worth $4 billion.
WisdomTree, a global exchange fund, provides Bitcoin ETN (WTBT) and Ethereum ETN (WETH). It offers a comprehensive range of diversified exchange products that leverage blockchain technology to both American and European investors and manages assets totaling $109 billion.
Valkyrie Investments, an American company, offers ETNs such as Bitcoin ETN (VBTC) and Zilliqa (VZIL). It has been serving clients in the US since 2023 and has a minimum entry threshold of $25,000.
When selecting an ETF provider, considerations like the size of the fees, profitability, and the potential of the asset are important. However, with ETNs, it is crucial to prioritize the business reputation of the issuer. Therefore, before investing in crypto ETNs, make sure to research the company's credit history and the backgrounds of its founders thoroughly.
