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Despite the crypto crunch, muted enthusiasm for related ETPs remains. The 126 global crypto ETPs monitored by TrackInsight SAS have seen combined net inflows of US$282-million so far this year.DADO RUVIC/Reuters

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Fund managers are slashing the cost of exchange-traded products (ETPs) to lure investors back into the asset class amid the ongoing crypto crash.

Cryptocurrency specialist 21Shares AG, a Swiss group, has launched a new vehicle that tracks the price of bitcoin that undercuts rivals – and even its own flagship products – in an effort to tempt investors as they try to weather the bear market.

The launch comes amid a painful sell-off for all things crypto, with the price of bitcoin down 70 per cent from its November highs to US$19,430, and the market value of the top 500 crypto tokens having slumped to less than US$1-trillion from a high of US$3.2-trillion.

21Shares’ new listed security comes with a total expense ratio of just 0.21 per cent. That is below the last round of cost-cutting when companies such as Fidelity Investments Inc. and Global X ETFs offered products tied to bitcoin at between 0.4-0.7 per cent. It is also an ocean away from the 1.49 per cent fee levied by 21Shares’ existing US$164-million flagship Bitcoin ETP.

“Some of our customers are more cost-sensitive than others so we have been working very diligently to develop what is, by far, the world’s cheapest crypto ETP,” says Hany Rashwan, chief executive officer and founder of 21Shares.

“We are focused on developing bear market products.”

However the Zurich-based group’s Bitcoin Core ETP comes with a catch. Unlike some rivals, it will be able to lend out some of its inventory of bitcoins and probably would do so to help it earn a profit despite the low fees.

Moreover, the revenues will go to 21Shares rather than investors in the fund because cryptocurrency ETPs fall outside Europe’s UCITS fund regime, which imposes stricter limits on securities lending.

Mr. Rashwan says it was not currently lending out coins but adds, “it’s very possible it will in the next month or two months. We will opportunistically lend.”

Mr. Rashwan says loans would be over-collateralized, with the collateral – bitcoin, ether or USD Coin, a so-called “stablecoin” – equivalent to at least 115 per cent of the value of the loan and marked to the prevailing market price twice a day. A stablecoin is pegged to a traditional currency like the dollar. Rashwan described over-collateralized loans as “incredibly safe.”

David Trainer, chief executive officer of investment research group New Constructs LLC, says the structure of 21Shares’ loans “seems reasonable” but believed risks remained of borrowers potentially defaulting.

“The more [crypto] falls and stays low, the more we are going to realize that certain firms are overexposed,” he says.

Singapore-based crypto hedge fund manager Three Arrows Capital Ltd. became the latest high-profile victim of the credit crisis sweeping through the digital asset market last week when it fell into liquidation.

Mr. Rashwan says the launch was just the first installment of 21Shares’ “crypto winter suite,” designed to help investors weather the bear market.

Its plans include risk-adjusted crypto ETPs that will offer some downside protection in return for surrendering some potential gains, “so the investor can have more confidence investing at this point.”

The products, likely to cover bitcoin, ether and potentially some broader crypto indexes, may have similarities to the buffered, or defined outcome, equity exchange-traded funds proving popular in the U.S.

Despite the crypto crunch, muted enthusiasm for related ETPs remains. The 126 global crypto ETPs monitored by TrackInsight SAS have seen combined net inflows of US$282-million so far this year. Their total assets are US$5.9-billion.

Although 21Shares’ assets have fallen from a peak of US$3-billion in November 2021 to US$1-billion, Mr. Rashwan says the aggregate share count for its ETPs was at a all-time high, again signifying net inflows.

“[Crypto] is going to change the world and it’s here to stay. There are a lot of investors, including institutional investors, who missed out on the last two bull runs,” he says.

“We are starting to see a lot of institutional investors poke their toe in and see if the time is right.”

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