In the second of a two-part article, SRP talks to the Swiss banking community about the creation and distribution of structured products based on cryptocurrency.
Despite the increased traction and an increasing number of products, bitcoin is "far too volatile to make it attractive as an underlying in a capital protected structure", according to Eric Blattmann (pictured), head public distribution financial products at Vontobel. "At the moment, there are no options in the market on bitcoin, which would be a prerequisite for a capital protected product," says Blattmann. "The high volatility of the new currency would also "make an option very expensive."
According to Blattmann, the new short tracker certificates allow investors to participate also in falling prices of bitcoin. "This brings a new dimension to investing in bitcoin, because it enables investors to invest in both directions of bitcoin performance," says Blattmann.
The new short strategies complement the initial offering, which is also visible on the turnover on the stock exchanges, according to Blattmann. "With our bankable products, investors who would like to invest in bitcoin benefit from the advantages of a certificate: no direct investment in bitcoin, but safekeeping in a securities custody account and easy trading on the stock exchange," says Blattmann. "This is not an alternative to existing products, but a complement to the existing offering, since it gives investors the opportunity to invest in both directions."
Despite the liquidity and volatility issues Bitcoin has just only started to make its way into investment products and structured products can be a way to provide access/exposure to this kind of 'new asset', according to Arnaud Masset, market analyst at Swissquote Bank. "The only problem at the moment is the lack of optionality (puts/calls) but we think it is only a matter of time before we see these instruments in the market," says Masset, adding that CME announced recently that is planning to launch futures on Bitcoin and CBOE is also moving to offer futures and options trading for Bitcoin. "There are challenges around the pricing of options as you need liquidity and the current volatility of Bitcoin but we think liquidity will increase as people invest in Bitcoin and creating derivatives will be a natural evolution."
According to Masset, the activity around digital currencies is also opening new opportunities around indexing. "Investors are demanding exposure to digital currencies and we will see new products providing access either via trackers or traditional tranche-based structures," says Masset. "At the moment the focus is on overcoming the hurdles around pricing, liquidity, volatility, asset weighting but this is also a sign that assets invested on digital currencies will continue growing."
On the indexing side, MV Index Solutions has just partnered with Cryptocompare - a London-based digital asset data provider - to launch a series of indices designed to track the performance of the fragmented global digital assets markets. The indices are the first to meet investment industry benchmarking standards by providing a public rulebook for any fork or other events, industrywide data distribution, proper identifiers and further standard index governance requirements that are expected from a regulated, unaffiliated, major benchmark provider.
The indices use comprehensive digital asset pricing methodology incorporating pricing and trade data from over 50 major digital asset exchanges around the world. Prices are weighted by volume to facilitate price discovery and best reflect the most accurate state of the digital assets markets. An index capping methodology for multi-component indexes promotes diversification and increases exposure to emerging digital assets.
The series includes 12 single digital asset indices (eg. Bitcoin, Ether, Ripple) and the following four multiple digital asset indices including the MVIS Cryptocompare indices: Digital Assets 25, Digital Assets 10, Digital Assets 5, and Digital Assets 100. "There is increasing demand for digital assets and ways to get exposure to them via products," says Thomas Kettner, managing director at MVIS. "We thought a set of indices would make sense as the industry moves to accept crypto currency. The main value of these indices is that they provide an indicative price for each of the currencies, and so it solves the problem of not being able to access a price via Reuters or MorningStar, as we cover prices shown in over 50 exchanges."
According to Gabor Gurbacs, director of digital asset strategy at VanEck, which owns MVIS, the value of the new family of indices is that they are developed by an independent company and are not affiliated to any trading platforms. "That is a big issue," says Gurbacs. "When you trade digital currencies from some of the platforms that are not independent and data focused, there is an element of trust missing. We think these indices address a regulatory requirement and also any conflict of interest."
This is the latest bitcoin tracker to be brought to market following the launch of XPT Provider's exchange-traded bitcoin notes earlier this year. Vontobel was the first to provide Swiss and German investors with tracker certificates on bitcoin in 2016, followed by Leonteq, which launched a new suite of exchange traded notes tracking bitcoin in October, according to SRP data.
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Swiss banks take lead on Bitcoin as Swissquote debuts actively-managed certificate
Product snapshot: Vontobel expands Bitcoin offering in Germany
Virtual currency ETNs get hot as first Ethereum trackers follow Bitcoin