Crypto ETNs: what you need to know

Exciting news: after four years of prohibition, UK retail investors will again be able to buy exchange-traded notes (ETNs) linked to cryptocurrencies.

The Financial Conduct Authority (FCA) lifts its ban on 8 October. Compliant products will likely hit mainstream brokers shortly thereafter.

According to the FCA, 12% of UK adults own crypto assets (around seven million people) and 26% of non-crypto asset owners say, “they would be more likely to buy crypto assets if the market and activities were regulated.”

In other words, crypto is gaining acceptance as a part of many people’s investment portfolios. (At least until the next crypto winter.)

What we want to know is:

• What type of crypto products has the FCA approved?
• How do they work?
• Do they actually track their associated cryptocurrencies?
• What are the risks?
• How are you protected if it all goes horribly wrong?
• What about tax?

That will do for starters.

The big win

Exchange-traded products of all types (ETFs, ETNs, and ETCs) enable more everyday people to invest in an asset class without getting embroiled in all the hassle that direct ownership usually brings with it.

• Don’t want to research the ‘best dynamite-proof safes’ to house your gold bar collection? Buy a gold ETC
• Don’t want a herd of cows turning up on your doorstep? Buy a commodities ETF
• Don’t want the next Sam Bankman-Fried to nick all your crypto? Buy a crypto ETN

You get the idea. With exchange-traded products, you can outsource the grief of asset ownership to trusted providers for a reasonable fee.

However that doesn’t mean all exchange-traded products are the same.

If you buy an MSCI World ETF then you can be pretty sure you are getting well regulated exposure to over a thousand leading stock market-listed companies.

But ETNs are not ETFs. And crypto ownership entails different risks to share ownership.

Importantly, you don’t actually own any crypto when you invest in this type of product. But the ETN issuer may well do. That exposes it and you to a steaming jungle of risks that I’ll touch upon below.

Meanwhile the rest of this article will help you go into all this with your eyes wide open.

What are crypto ETNs?

The FCA has only green-lit the sale of crypto ETNs (not ETFs) to retail investors in the UK.1

The UK-approved crypto ETN headlines are:

• Bitcoin or Ether are the only cryptocurrencies that can be linked to via an ETN for now
• The ETN must track the market price of its cryptocurrency – often via a third-party index
• It should be physically backed by a non-leveraged asset. That underlying asset can be Bitcoin or Ether, but it doesn’t have to be
• ETNs aren’t protected by the FSCS compensation scheme. (Neither are ETFs for that matter, though hopefully you’ve chosen a broker who is)
• Crypto ETNs are tradeable on the London Stock Exchange
• ETNs can be bought in your ISA or SIPP, so long as the issuer has ticked the necessary boxes
• ETNs are not governed by the warm and cuddly UCITS regulations
• Total Expense Ratios (TERs) are likely to range from 0.15% to 2%

ETNs aren’t new. They’ve been used to track certain assets (like old-school currencies) long before crypto.

Indeed crypto ETNs aren’t new either. They were offered to the UK public up until they were restricted in January 2021. And they’ve gathered billions in assets from UK professional investors and European retail investors since then.

These existing products are obviously the ones most likely to come on-stream for retail investors after 8 October. Which is handy for us, because it means we can size them up beforehand.

Notable names

Crypto ETNs are issued by both traditional investment asset managers and crypto-native outfits.

Familiar names that already offer ETNs in the UK and Europe include WisdomTree, Invesco, Fidelity, VanEck, and BlackRock.

Crypto-focussed brands include 21Shares, Bitwise, Coinbase, and Valour.

Crypto ETNs: the dark and dingy details

ETNs are debt securities rather than investment funds. In exchange for your cash, you get a promise that the issuer will pay you a return in the future.

What happens if the ETN’s issuer defaults? In that case you may be paid less than you are owed – or not at all.

In debt parlance, you’ll ‘take a haircut’. Probably one that feels more like the medieval lock-chopping practised by religious maniacs than a nice tint and blow-dry down your local salon.

But what might prevent you from getting entirely mullet-ed in such a scenario is collateral.

A ‘collateralised’ ETN protects the value of your investment with a big stash of assets lodged with an (ideally) independent and reputable custodian.

Should your issuer be unable to pay, this collateral can be sold to honour the debt.

You might ask does your issuer stow away enough collateral to cover the value of its obligations? Is the collateral good quality? Will it fetch enough on the market to pay back investors during a crisis?

All good questions, which you’ll have to answer on a case-by-case basis (and by delving into the details provided by your ETN on its website).

The dating game

ETNs can be dated or undated debt instruments.

• Dated means the ETN has a fixed maturity date. Just like a bond does.
• Undated means the security is theoretically perpetual – like a share (or an old-fashioned ‘consol’ if you’re a bond aficionado or a Jane Austen fan).

You’d expect crypto ETNs to be undated – that is, for the security to be available so long as there’s a market for it and nothing blows up.

But an ETN can be called. This means the issuer can redeem it at any time – paying back investors with the cash in the collateral kitty.

It’s worth reading the ETN’s prospectus to understand what happens in the event your chosen product is redeemed early. Especially the sections on how the claims of other parties will be paid before the investors.

You’ll likely come across choice phrases such as:

…following satisfaction of all priority claims, such Security holders [that’s us!] may not receive payment of the Early Redemption Amount in full and may receive substantially less and may potentially receive nothing.

There’s lovely.

There’ll also be an early redemption fee to boot.

So choose an ETN that’s stocked with plenty of collateral. The issuer is under no obligation to make any other assets available in the event of a shortfall.

Let’s get physical

ETNs can be synthetic as opposed to physically backed.

A synthetic ETN employs a swap-based derivative to deliver the performance of the underlying asset. This introduces another layer of counterparty risk, because the company providing the swap could fail.

This may be moot for now, since it looks like only physically-backed crypto ETNs will be admitted to the London Stock Exchange. But it’s still worth checking if you’re compiling a shortlist of candidates.

Do crypto ETNs actually track their crypto’s spot price?

Here’s a quick USD comparison of the Bitwise Physical Bitcoin ETP (BTCE) versus Bitcoin’s market price.

Source: Google Finance (26 Sep 2020 to 22 September 2025).

BTCE

Source: justETF (26 Sep 2020 to 19 September 2025).

JustETF and Google Finance can’t quite agree on what five years is, so up next is the result I got when I matched the dates for a comparable long-term view:

Asset	5-yr cumulative return (%)	5-yr annualised return (%)
BTCE	878	56
Bitcoin	990	61

Dates: 26 Sep 2020 to 19 September 2025. (BTCE inception date: 9 Jun 2020, TER: 2%.)

That’s an astounding return from Bitcoin either way – assuming you held on during the 77% death slide from November 2021 through November 2022.

But still, BTCE gave up 5% a year in comparison to Bitcoin – a tracking difference that isn’t entirely accounted for by the ETN’s eye-watering 2% TER.

Tracks of my tears

Transaction costs, taxation, blockchain network fees, collateral overheads, brokerage charges, and various other operational frictions can all eat into your return without necessarily being captured by the TER.

You’re also likely to see a clause like this nestled in a crypto ETN’s prospectus:

The market value and price of the ETP securities does not exclusively depend on the prevailing price of bitcoin and changes in the prevailing price of bitcoin may not necessarily result in a comparable change in the market value of the ETP securities.

Other ETNs may track their linked cryptocurrency more faithfully than BTCE. I haven’t checked other products or timeframes.

But the point here is I’ve never seen such a large tracking difference gap when investigating vanilla ETFs tethered to mainstream asset classes.

On that basis, I recommend checking the tracking difference performance of all your prospective ETN candidates versus their linked cryptocurrencies. It looks like being an important factor.

Watch out for wide spreads, too. This is another cost of business that may vary widely, depending on the ETN’s liquidity and, at times, shifting perceptions of the creditworthiness of the issuer and any associated service providers.

Crypto ETNs: the risks

Reading the risk section of a crypto ETN’s prospectus is like visiting a chamber of horrors. Every grisly fate and sticky end your ETN could meet is listed.

Or at least I hope it’s listed.

Either way it’s an educational read and, if you’re on the fence about crypto investing, it could send you running in the opposite direction of the alluring 900% return graph I showed above.

To give you a flavour, let’s pick out a few highlights from the risk section of the iShares Bitcoin ETP (IB1T) prospectus. (To be clear this is just illustrative: I have no reason to believe that IB1T is a particularly risky crypto ETN.)

What follows is a sample of the higher-dimensional risk space you enter when crypto is involved. It’s got more dimensions than string theory…

Theft of crypto

…the Issuer’s bitcoin may be subject to theft, loss, destruction or other attack, which may result in the value of the Securities being reduced, potentially to zero.

Irrecoverable losses

A breach of the Issuer’s account at the Custodian or the Prime Execution Agent could result in the partial or total loss of the Issuer’s assets, which is likely to result in a partial or full loss in the value of the Securities.

If any relevant Cryptoassets are lost, stolen, damaged or otherwise compromised in circumstances in which the Custodian, the Prime Execution Agent, another service provider to the Issuer or any other party is liable to the Issuer for such loss, theft, damage or compromise, the Custodian, the Prime Execution Agent or other responsible party may not have sufficient resources to fully compensate the Issuer.

Security risks including the efficacy of cold storage

The security procedures in place for the Issuer’s bitcoin may include offline ‘cold’ storage, the use of multiple encrypted private key ‘shards’, and other measures designed to reduce the risk of the loss or theft of the Issuer’s bitcoin. However, these cannot guarantee the prevention of any loss due to a security breach, software defect or force majeure event that may be experienced by the Issuer or the Custodian…

Cryptoexchange risk

Crypto asset platforms are often unregulated in nature and may be vulnerable to manipulative trading activity, business failure, fraud and security breaches. In addition, if a crypto asset platform which a Series of Securities utilises for storage, trading and/or settlement becomes insolvent this may lead to a loss of the Issuer’s underlying assets and therefore a loss for the relevant Security holders.

Concentration of Bitcoin ownership

Crypto assets may be subject to attacks by malicious actors or groups of actors. If a malicious actor or botnet obtains control of more than 50% of the processing power dedicated to mining on the Bitcoin network, it may be able to alter the Bitcoin blockchain on which transactions in bitcoin rely by constructing fraudulent blocks or preventing certain transactions from completing in a timely manner or at all (a ‘51% attack’).

To the extent that such malicious actor or botnet did not yield its control of the processing power on the Bitcoin network, or the Bitcoin community did not reject the fraudulent blocks as malicious, reversing any changes made to the Bitcoin blockchain may not be possible. There have been a number of examples of 51% attacks on cryptocurrencies.

Devaluation risk

…there is no guarantee that the current 21 million supply cap for outstanding Bitcoin, which is estimated to be reached by approximately the year 2140, will not be changed. If a hard fork changing the 21 million supply cap is widely adopted, the limit on the supply of Bitcoin could be lifted, which could have an adverse impact on the value of bitcoin and the value of the Securities.

Cryptography risk

The cryptography underlying bitcoin could prove to be flawed or ineffective, or developments in mathematics and/or technology, including advances in digital computing, algebraic geometry and quantum computing, could result in such cryptography becoming ineffective.

Any resulting reduction in the integrity of, or confidence in, the source code or cryptography underlying crypto assets generally could negatively affect the demand for crypto assets and therefore may adversely affect the value of Bitcoin and consequently the value of the Securities.

Developer risk

Some developers may also be funded by entities whose interests are at odds with the interests of other participants in the Bitcoin network or with the interests of investors in bitcoin. A bad actor could also seek to interfere with the operation of the Bitcoin network by attempting to exercise a malign influence over a core developer.

Taxation risk

There is currently no tax certainty regarding the treatment of investments in crypto assets across various jurisdictions due to the novelty of the asset class. Accordingly, the taxation of the crypto assets and associated investments can vary significantly from jurisdiction to jurisdiction and may be subject to change, potentially also with retroactive effect. Any change in the tax treatment of the crypto assets could result in the Issuer incurring additional taxes…

…and there’s plenty more where that came from. I’m not even getting into the regulatory risk, or the uncertainty over whether the issuer could legally enforce its claim to the ETN’s crypto collateral held with third-parties.

Really, you could replace all 23,867 words in the prospectus’ risk section with the legend: AAAAARGH!

Or as the issuer succinctly puts it:

Don’t invest unless you’re prepared to lose all the money you invest.

Crypto ETN tax

Okay, let’s turn now to something more relaxing. Tax.

A crypto ETN does not pay an income. Thus the only tax to worry about is capital gains – payable if you hold the product outside of your tax shelters.

Also, if the ETN is domiciled outside of the UK then check it has reporting fund status. If not then capital gains will be taxed at income tax rates when you sell. That could hurt!

Note that this reporting fund stuff doesn’t apply if you’ve safely stashed your ETN in an ISA or SIPP.

Crypto ETN checklist

When comparing crypto ETNs, look for:

Cost of ownership – What’s the TER, bid-offer spreads, tracking difference?

Collateral – What assets are held as collateral, how much is held versus the value of the product, are there daily disclosures, is the collateral insured and independently audited?

The custodian – Is the keeper of the collateral independent and reputable?

Securities lending policy – Can the collateral be lent out? That would invite yet more counterparty risk.

Asset protection – Is the crypto mostly held offline in cold storage? Are the ETN’s assets segregated from other parties?

Product structure – Is the ETN backed by physical cryptocurrency or another asset, or does it use synthetic replication (that is, swap-based derivatives)? Physical is usually safer.

Price index – Google it. Is this index reputable? Does it definitely track the crypto’s spot price?

ETN leverage – Look for a 1:1 ratio to ensure you’re getting a non-leveraged product. (Unless you actually want leverage, you complete and utter nutter.)

Tax – Can I hold the product in my ISA or SIPP? If not, does it have reporting fund status?

Early redemption, default, and failure – What does the prospectus say about these scenarios?

Best of luck!

Obviously none of this is investing advice. We’re just running through things to think about should you decide you want to research these new offerings for yourself.

Personally, I can’t say I’m about to sink my life savings into crypto. But I will follow along with interest. I think crypto is an astounding phenomenon but I have grave doubts about its worth as an asset class in a wider portfolio.

Of course, my views are neither here nor there. And even the FCA has caved to the inevitable, because swathes of Brits were opting to take their chances in unregulated offshore exchanges. Not to mention the various other crypto-powered vehicles that had crept onto the market.

Is this progress? I don’t know. But I am fascinated.

Take it steady,

The Accumulator

1. The ‘retail investors’ category refers to ordinary punters like you and me who invest their own money in their own accounts. As opposed to professional investors who trade for a living, or ‘sophisticated’ investors who can typically afford to lose a lot of money if they spunk their cash away on a scam. [↩]