Recently introduced exchange-traded notes (ETNs) for bitcoin and ethereum on the London Stock Exchange (LSE) are experiencing challenges in attracting investments, as indicated by crypto ETP providers citing a lack of institutional interest.
In May, 21Shares unveiled four new physically-backed crypto ETNs, encompassing the 21Shares Bitcoin ETN, 21Shares Ethereum Staking ETN, 21Shares Bitcoin Core ETN, and the 21Shares Ethereum Core ETN.
Additionally, WisdomTree brought forth a Bitcoin and Ethereum ETN in May, while Invesco debuted the Invesco Physical Bitcoin ETP on the LSE just this week, boasting a total expense ratio of 0.39%.
These crypto ETNs mirror the performance of underlying assets like bitcoin or ether and are traded and settled akin to regular shares.
LSE Late to the Party
The sluggish uptake of the new crypto products since their listing can be attributed to several factors, primarily the restriction to professional investors imposed by the Financial Conduct Authority (FCA) regulations. This limitation significantly narrows the pool of potential investors, hindering widespread adoption.
Hector McNeil, co-founder and co-CEO of HANetf, points out that the London Stock Exchange (LSE) entered the crypto space relatively late compared to other markets like the Xetra German Electronic Exchange, where there’s already ample liquidity. This delayed entry may have contributed to the subdued interest in LSE-listed ETNs and ETPs.
Furthermore, the FCA’s prohibition on retail consumers investing in these products, coupled with the ban on the sale of crypto derivatives and ETNs in 2021, further dampens local retail interest and undermines trading volumes.
McNeil suggests that there’s hope for increased market activity if the FCA revises its stance to align more closely with the accessibility of “complex ETPs” such as leverage ETPs, granting sophisticated retail investors broader access. Such a change could stimulate a deeper and healthier local market for crypto products.
Lack of Institutional Demand
According to Laurent Kssis, an independent board member of Issuance Swiss AG and an experienced figure in crypto ETPs, there are several potential explanations for the relatively low trading volumes of crypto ETNs listed on the London Stock Exchange.
Kssis highlights the absence of institutional demand as a key factor. In traditional financial markets, institutional investors like hedge funds, pension funds, and asset managers typically play a crucial role in driving substantial trading volumes. However, the level of institutional adoption and demand for crypto ETNs in the UK may still be limited, which could dampen trading activity.
In essence, the lack of significant participation from institutional investors may be hindering the broader traction and trading volumes of crypto ETNs on the London Stock Exchange.
Regulatory Uncertainty Impacted Inflows
Regulatory uncertainty is a significant factor influencing inflows into newly listed crypto ETNs. The ever-changing and complex regulatory landscape surrounding cryptocurrencies and related investment products can deter some investors from actively trading these ETNs, resulting in lower liquidity and trading volumes, as noted by Kssis.
Furthermore, the European market for ETPs is already saturated, particularly in Germany, Switzerland, and France. Existing EU investors have various avenues for exposure to cryptocurrencies, including spot trading, futures contracts, and direct ownership of digital assets, creating stiff competition for LSE-listed crypto ETNs.
Moreover, the presence of alternative investment products may divert trading activity away from these newly listed ETNs. With numerous ETPs already trading in Europe, investors have a range of options to consider.
Adding to the mix is the dominance of US Spot ETFs, which attracted substantial capital from institutional investors in the first wave, particularly in Q1, with BlackRock securing a significant portion of the market share.
Market Maker Support for Crypto ETNs
Another critical factor at play is the level of market maker support for these products, with Flow Traders serving as the primary market maker. “Sufficient market maker support is crucial for ensuring liquidity and efficient trading in financial products. Currently, we rely on one market maker and a handful of authorized participants,” emphasized Kssis.
