An Exchange Traded Note (ETN) is a debt instrument that is backed by the credit of the issuer like a bank. It is designed to enable investors to access returns on different market benchmarks.
ETN returns are linked to the performance of a specific market benchmark minus the investor fees. So when an investor purchases an ETN, the issuing entity promises to pay the amount that is reflected on the index after taking their fee upon maturity.
ETN’s also don’t actually own any of the underlying assets behind the benchmarks or indices that they are designed to track. So in the case of a Bitcoin ETN, it’s a debt instrument that monitors Bitcoin.
However, an Exchange Traded Fund (ETF) is an investment vehicle that allows investors to dip their toes into a given market but without the associated risk of buying the asset itself. In a country like the U.S. ETF’s are classified as securities, and they are used to track the movement of a given asset (in our case Bitcoin).
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A Short History Of Bitcoin ETNs and ETFs
Last year saw the U.S. Securities and Exchange Commission reject many Bitcoin ETFs starting with the first attempt that was launched in March of 2017 by the Winklevoss twins. So far the agency has denied over ten proposals from different firms including VanEcK, ProShares, Direxion’s and GraniteShares.
SEC has cited market manipulation as one of the key reasons why they have been reluctant to approve ETFs.
Interestingly, last August saw an ETN dubbed Bitcoin Tracker One quoted in dollars for the first time opening the “soft’ alternative to the Bitcoin ETF to the US market. The ETN was listed under the ticker CXBTF.
However, the ETN has been in existence since 2015 and had been trading on the Swedish exchange but was only available in Swedish Krona or euros.
How Bitcoin ETNs Differ From Bitcoin ETFs
In practice, both are very similar as they are designed to track Bitcoin. They also have lower expense ratios when compared to actively managed mutual funds and finally, like stocks they trade on major exchanges.
But that is where the similarities end. Some of the differences include the fact that ETF’s target institutions and large Bitcoin investors compared to ETN’s that target retail investors.
Also, when an investor invests in an ETF, they are investing in a fund that is holding the asset it is tracking. In the case of Bitcoin ETF’s the asset is BTC.
However, an ETN resembles a bond. It’s an unsecured debt note that is issued by an institution. Like it is the case with a bond, an ETN can be held until it matures or can be sold at any time the investor feels like. However, if the underwriter (which is usually a bank) was to go bankrupt, the investor risks a total default.
For this reason, investors are advised to carry out thorough research on the credit rating of the underwriter before they invest in an ETN.
ETN’s also have a few advantages over ETF’s. Since they don’t buy and sell assets within their funds like ETF’s, they are not taxed until the fund is sold which often occurs many years later. This triggers long term capital gains that usually comprise of lower tax rates compared to short term capital gains.
Another advantage of ETN’s over ETF’s is that they lack tracking errors. ETF’s incur expenses from tracking their respective index. This leads the firm to underperform the index over time. However, since ETN’s don’t rely on buying and selling their underlying asset, expenses don’t build up over time.
How Bitcoin Tracker One Works
Bitcoin Tracker One is the first listed Bitcoin-based security that operates on a regulated exchange. It was after launched in 2015 on Swedish based NASDAQ/QMX exchange. The platform classifies the ETN as a non-equity linked ‘tracker-certificate.’ Basically, security which tries to track the performance of Bitcoin and also trades like any other standard share that is listed on the exchange.
Bitcoin Tracker One offers investors exposure to the performance of BTC by tracking the price of BTC/USD before a fee. The product tries to offer a daily return that is approximately equal to the performance of BTC across a few exchanges that have the most liquidity as selected by the ETN provider before taking into account fees and costs.
Simply put, if the price of BTC moves up or down 5%, the price of the ETN should also move by the same percentage. The ETN has the approval of the Swedish FSA.
How To Trade The Bitcoin ETN
Investors interested in the Bitcoin Tracker One ETN can purchase the shares using the CXBTF ticker symbol through brokerage accounts. Whenever an investor buys shares of the ETN, they pay money and get an equivalent stake in BTC that is less the fees charged.
For example, if BTC is trading for $4,000 and maybe the shares of Bitcoin Tracker One ETN are available for $30 each. Any investor that is buying the minimum required one share of the ETN will have to pay the share cost to the issuer. The issuer will then proceed to purchase an equal amount or a fraction of Bitcoins equivalent to the amount received.
So, the ETN allows all investors to make small investments in BTC that are of low cost. Whenever an investor wants to cash out their BTC ETN holdings, they can just sell these shares for dollars.
Risks That Are Associated With Bitcoin ETN’s
One significant risk that is associated with the Bitcoin Tracker One ETN is forex risk. Even though it’s now possible for investors to purchase these ETN’s using dollars and the orders are executed in dollars, they are still cleared and settled in local currency.
They are also held in custody in Sweden. This means any fluctuation in the dollar-krona rate will have an impact on the net returns.
There is also credit risk that is linked to the financial position of the institution offering the ETN and the counterparty risk in case the issuer defaults.
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