Introduction
The
introduction of gold coinage by the Lydian King, Croesus in 6th
Century BC, changed the way goods and services were valued and exchanged by
replacing the age-old barter system. Gold was something rare, tangible,
beautiful and could store value in a small, portable and almost indestructible
form.[1]
The
introduction of paper money in 11th Century China was the next
evolution – paper has little to no intrinsic value, but a bank note obtained
value because it could be exchanged for a specified amount of gold held by the
government or central bank– a system known as the ‘gold standard’. This system
lasted until the 1970’s when President Nixon severed the relationship between
the Dollar and gold and ushered in the age of fiat currencies.[2]
Most modern
currencies are fiat, including the US Dollar, British Pound and Euro. Fiat
currencies are issued by a government and not backed by gold, but instead have value
because of the faith that individuals and governments have that other parties
will accept that currency. However, the
age of central bank issued fiat currencies is being challenged. In 2008 a new idea
was introduced by an unknown person or group
using the name “Satoshi Nakamoto” – Bitcoin.
Bitcoin is
a decentralized digital currency without a central bank, government or single
administrator. Bitcoin can be sent between users on the bitcoin network without
the need for intermediaries.
It relies on a technology
called blockchain - a list of
records (blocks) that are linked by cryptography – hence ‘crypto’ currency. Each
block contains a timestamp, a cryptographic tag of the previous block and
transaction data. Blockchain is highly secure, fast and hard to tamper with as
changes to a block must be validate by a majority of users within the system. This
makes it great for transferring sensitive data, including contracts,
shareholder details, medical records or money transfers.
The Investment Case for Bitcoin
The first
Bitcoin transaction occurred in 2010 when two pizzas were bought for 10,000 BTC
– at the time worth $30. Records make no mention of the toppings or if there
was a stuffed crust.
Since then
cryptocurrencies have rarely been out of the headlines, prompting increased
investor interest and a raft of competing currencies. Estimates vary on the number of
cryptocurrencies - research site CoinMarketCap tracks over 5,000, but few of
these have ever come close to Bitcoin’s meteoric success. Given the growing
institutionalization of the Bitcoin market and acceptance of the long-term
viability of Bitcoin as an alternative digital currency, there are compelling
arguments for investors to consider adding a Bitcoin allocation to their
portfolio:
-
High growth potential vs traditional asset
classes;
- Low correlation to other asset classes and diversification;
- Potential for improved risk-adjusted returns
in a multi-asset portfolio.
However, please remember:
- Bitcoin
can be a volatile product
- The
price of Bitcoin can go down as well as up and your capital is at risk
Performance and Growth Potential
The
performance of Bitcoin has been strong against main indices over 1, 3 and
5-year periods, providing a new source of potential returns. Due to its finite
supply, Bitcoin can also act as a useful store of value in countries that are
experiencing extreme currency fluctuations or inflation. However, these
impressive growth numbers come at a cost of high volatility meaning investors
could lose a significant portion of their allocation if they bought in at the
wrong time. Analysts expect Bitcoin volatility to reduce as the market becomes
more regulated and further institutionalises.
Performance
of Bitcoin vs other financial instruments
|
1 Month |
3 Month |
1 Year |
3 Years |
5 Years |
Bitcoin
|
-6.3%
|
-12.8%
|
92.7%
|
658.9%
|
2185.8%
|
S&P 500
|
2.6%
|
8.3%
|
28.6%
|
44.0%
|
56.6%
|
US Bonds
|
0.0%
|
0.1%
|
8.9%
|
13.8%
|
16.4%
|
Gold
|
2.3%
|
2.1%
|
16.6%
|
27.8%
|
22.7%
|
Oil
|
0.0%
|
2.0%
|
7.1%
|
22.1%
|
32.6%
|
FTSE 100
|
3.9%
|
3.0%
|
13.4%
|
6.9%
|
16.2%
|
Eurostoxx
|
1.9%
|
5.7% |
25.8% |
14.7%
|
20.0%
|
Source:
Bloomberg. All data as of 31st December 2019. Past performance is not a
guarantee of future returns.
Demand is Rising, But the Supply is Strictly Limited
Key to the
maintenance of a currency's value is its supply. A money supply that is too
large could cause prices of goods to spike, resulting in economic collapse. A
money supply that is too small can also cause economic problems.
Bitcoin is
actually a hard currency, with a defined and finite supply hardwired within its
codebase - unlike fiat currencies where governments or central banks have the
power to increase the money supply at will.
When
Bitcoin was launched in 2009, its developer(s) capped the supply of tokens at 21
million coins. The current supply of Bitcoin is around 18 million and importantly,
it’s becoming harder and harder to mine as the rate at which Bitcoin is
released is halved roughly every four years.
When a
halving occurs, it means the Bitcoin reward that miners receive for solving a
mathematical problem / adding a block to the blockchain is halved. This makes
it increasingly difficult to mine Bitcoins and increases the cost of mining and
the scarcity value of Bitcoin. The last halving just occurred in May 2020. Historically, Bitcoin halvings have been
followed by a long-term increase in the value of Bitcoin.

Past
performance is not a guarantee of future returns. Data as of 13th
May, 2020, Source Bloomberg.
Correlation and Diversification:
One of the most compelling arguments
for a Bitcoin allocation is its low correlation to other widely held asset
classes both in periods of market calm and turbulence. Bitcoin’s independent
behaviour means that it has the potential to be a powerful diversification tool
in a multi-asset portfolio.[3]
|
S&P 500 |
US Bonds |
Bitcoin |
Gold |
Oil |
EM Currencies |
FTSE 100 |
Eurostoxx |
EUR/USD |
GBP/USD |
S&P 500
|
|
0.83 |
0.84 |
0.59 |
0.95 |
0.85 |
0.77 |
0.45 |
0.37 |
-0.61 |
US Bonds
|
0.83 |
|
0.69 |
0.84 |
0.85 |
0.81 |
0.52 |
0.25 |
0.11 |
-0.65 |
Bitcoin |
0.84 |
0.69 |
|
0.55 |
0.79 |
0.77 |
0.66 |
0.42 |
0.55 |
-.0.43 |
Gold
|
0.59 |
0.84 |
0.55 |
|
0.60 |
0.80 |
0.41 |
0.12 |
0.23 |
-0.50 |
Oil
|
0.95 |
0.85 |
0.79 |
0.60 |
|
0.79 |
0.67 |
0.27 |
0.33 |
-0.69 |
EM Currencies |
0.85
|
0.81 |
0.77 |
0.80 |
0.79 |
|
1.00 |
1.00 |
1.00 |
1.00 |
FTSE 100 |
0.77 |
0.52 |
0.66 |
0.41 |
0.67 |
0.76 |
|
0.66 |
0.34 |
-.0.60 |
Eurostoxx
|
0.45
|
0.25 |
0.42 |
0.12 |
0.27 |
0.43 |
0.66 |
|
0.14 |
0.04 |
EUR/USD
|
0.37
|
0.11 |
0.55 |
0.23 |
0.33 |
0.51 |
0.34 |
0.14 |
|
0.06 |
GBP/USD |
-0.61 |
-0.65 |
-0.43 |
-0.50 |
-0.69 |
-0.55 |
-0.60 |
0.04 |
0.06 |
|
Source: Bloomberg. Data as of 31st
December, 2019
Due to its powerful diversification
characteristics, Bitcoin can play an effective role boosting portfolio
efficiency. In the two following charts we show the impact of adding a
small bitcoin allocation to a US equity portfolio.
The first chart illustrates a basic
buy and hold strategy whereby an investor replaced between 1% and 5% of their
equity allocation with Bitcoin.
Historically, investors would have
seen significant benefits of holding even a small quantity of Bitcoin, with
returns improving in line with the size of the allocation. An investor in this
scenario with a 5% Bitcoin allocation would have made nearly 3x more over the
period than an investor with no allocation.

For
Illustrative purposes only Past performance is not a guarantee of future
returns. Data as of 13th May, 2020, Source Bloomberg.
Many investors will regularly
rebalance their portfolios back to target weights for specific assets. If the
given Bitcoin allocation was reset on a monthly basis, historically, investors
would have lost out on a significant amount of performance resulting from the
compounding effect of the Bitcoin allocation.
In addition, investors would also have
incurred substantial trading costs to perform the rebalance that would further
detract from performance and which are not captured in this chart.

For
Illustrative purposes only Past performance is not a guarantee of future
returns. Data as of 13th May, 2020, Source Bloomberg.
Given
these appealing characteristics, Bitcoin can potentially play a powerful and
useful role in a multi-asset portfolio – so why haven’t more institutional
investors embraced its potential?
Why Don’t More Investors Buy Bitcoin?
Despite
these desirable characteristics, many investors still perceive Bitcoin as an experimental
asset that is complicated to trade and open to abuse. Stories of cryptocurrency
frauds and failures and the collapse of high-profile cryptocurrency exchanges
like Mt Gox still loom large in many investors’ minds. Additionally, the
complexity of managing a Bitcoin wallet, trading on largely unregulated crypto
exchanges, local regulatory restrictions and lack of availability of Bitcoin on
broker and wrap platforms has impeded adoption from traditional asset and
wealth managers.
The future of Bitcoin as legal tender and as
an investment asset will depend on a number of factors. A solid regulatory
framework will help create a more transparent market and if more protections
are offered to investors, more will be attracted to the market. In turn, this
will build confidence in the cryptocurrency market and lead to greater pricing
efficiencies. The treatment of capital gains from investments in Bitcoin will
also catalyse the further development of the market. Lastly, confidence in the Bitcoin
market will be improved if two disadvantages are properly addressed—namely,
complexity and insecurity.
Solutions
are now becoming available that can provide access to the powerful
diversification and return potential of Bitcoin in a regulated, transparent and
exchange-listed structure that is as easy to trade as any share of ETF.
Introducing BTCETC Bitcoin Exchange Traded Crypto
(BTCE)
BTCetc
Bitcoin Exchange Traded Crypto (Ticker: BTCE) is an exchange traded
cryptocurrency (ETC) that tracks the price of Bitcoin.
The ETC is 100% physically backed by Bitcoin, it trades on
Deutsche Börse´s electronic trading system XETRA, and is the world’s first centrally
cleared exchange traded Bitcoin product [4], providing investors with one of the safest
and most liquid ways to gain exposure to Bitcoin. Each unit
of BTCE gives the holder a claim on a predefined amount of Bitcoin.
An Easier
Way to Invest in Cryptocurrency
Investing
in BTCE is as simple as buying shares through your broker or bank. Unlike investing directly in Bitcoin, there
is no need to engage with the technical challenges of setting up a
cryptocurrency wallet to store Bitcoin. Your units of
BTCE are safely held with your broker or bank, thus removing the risk of losing
your investment due to a lack of knowledge of how cryptographic keys work.
Invest in
Bitcoin on a Regulated Exchange
BTCE is
traded on XETRA, one of the largest exchanges in Europe. As Deutsche Börse is a
regulated exchange, this means that investors can trade with confidence knowing
that all market participants are strictly vetted and carefully monitored to
prevent market abuse. The alternative is to buy Bitcoin on cryptocurrency
exchanges, most of which are unregulated or do not have as strict security and
compliance standards.
Ample
Liquidity
The issuer
has partnered with world-class liquidity providers and authorised participants
(APs) to ensure ample liquidity, resulting in tight spreads on-exchange and the
ability to create or redeem units of BTCE on the primary market.
Redemption
for Bitcoin
BTCE can
also be redeemed directly for Bitcoin. As an additional layer of protection for
investors, every redemption transaction must be confirmed by the issuer and a
reputable third-party administrator to ensure that no Bitcoin can be
misappropriated due to misconduct or negligence on behalf of the issuer.
Safe
Custody
The issuer
stores the Bitcoin with BitGo Trust Company, a secure, regulated custodian,
purpose built for holding digital assets.
Strict KYC and AML standards ensure that the provenance of all
cryptocurrency in custody has been vetted.
BTCE is
issued by ETC Group and marketed and distributed by HANetf. Past performance is
not an indicator of future performance, and when you trade ETCs your capital is
at risk.
Advantages of BTCE and
Exchange Traded Bitcoin:
- Bitcoin
exposure simplified: exchange-listed, regulated and secure
- Buying and selling BTCE is as
simple as trading any normal share
- You
trade through your regulated broker, on regulated exchanges with a central
clearing mechanism
- You
don’t need to manage a crypto wallet or trade on unregulated crypto exchanges
- You
don’t need to manage cryptographic keys or blockchain technology
Risks of investing in BTCE:
- Like equities, an investor’s capital is fully
at risk and you may not get back the amount originally invested
- Exchange rate fluctuations can also have both
a positive and negative effect on returns.
- Past performance of Bitcoin is no guarantee of
future performance.
- The product may not be a suitable investment
for all investors and each investor should determine the suitability of its
investment in light of their own circumstances
- For a full, list of risks associated with the
BTCE product, please consult the prospectus.
Bitcoin Trading vs Exchange Traded Bitcoin
Buying and storing Bitcoin has not always been easy, and many
investors have been sceptical or scared of getting involved given teething
problems within the cryptocurrency market infrastructure.
Here’s how BTCE provides a safer, easier and
more familiar experience for mainstream investors:
Issue |
|
BTCE: Bitcoin Exchange Traded Crypto |
Accessibility
|
Buying Bitcoin requires the investor to set up
an account with a so-called ‘Bitcoin exchange’, which can be a lengthy and
time-consuming process. Such ‘exchanges’
are mostly unregulated entities and investors face increased risk of a weak
level of transparency, the lack of investor protection mechanisms, and market
manipulation.
|
BTCE can be purchased on Deutsche Börse (XETRA),
one of the largest stock exchanges in Europe in terms of both market
capitalization and monthly trading volume. Virtually every broker in the world
should have the ability to buy products traded on XETRA for its clients.
Trading is constantly monitored by sophisticated software to detect and prevent
market abuse.
|
Technical
and
Complex
|
Setting up a cryptocurrency wallet isn’t easy
and preventing theft or loss of value due to other reasons (e.g. losing the
keys) even harder. Blockchain wallets are not like credit cards or bank
accounts, users of Bitcoin can’t chargeback fraudulent transactions or show up
with their ID at the bank desk to recover access – what is lost is usually lost
forever.
|
BTCE keeps Bitcoin backing the product at the
reputable, safe, regulated and insured depositary called BitGo Trust Inc. It is
virtually impossible to store Bitcoin in any safer way than how it is done
through BitGo. Deposits are insured by Lloyds of London against hacking and
white-collar crime up to the value of $100 million. BitGo is a regulated trust
and all Bitcoin is stored air-gapped in cold storage in their vaults.
|
Liquidity Concerns
|
Firstly, the Bitcoin market is very fragmented;
it does not have a single recognized pool of liquidity or place of price
discovery. Investors interested in purchasing big volumes of Bitcoin face
access problems described above multiplied by the number of ‘Bitcoin exchanges’
they need to connect to in order to tap into an acceptably big pool of
liquidity.
Secondly, IT systems of many ‘Bitcoin exchanges’ are
technologically inferior to the systems operated by established stock
exchanges, and this fact makes top-notch liquidity provision very difficult or
even impossible.
Finally,
not every professional market-maker is participating on ‘Bitcoin exchanges.
Market-makers face the same technical, access, legal and regulatory challenges
and issues alongside with investors. For that reason, some market-makers are
willing to provide liquidity only on regulated stock exchanges.
|
BTCE shares many benefits with traditional ETFs/ETPs
– as it is exchange listed and supported by an ecosystem of market makers and
APs (many of which would not be willing to provide liquidity in Bitcoin
itself), there is guaranteed two-way pricing available throughout the trading
day. The team behind BTCE have contracted multiple professional
market-makers to translate fragmented Bitcoin liquidity into concentrated
on-Exchange BTCE liquidity. Through direct connection to the underlying
asset via the create /redeem mechanism, BTCE can provide liquidity for
both very large and very small trades, levelling the playing field between
investors.
|
Legal Restrictions
|
Some investors might not be allowed to buy or
hold Bitcoin, due to restrictions imposed by the regulator or investment
mandate.
|
BTCE is a security. If you can buy and hold
securities, you can buy and hold BTCE.
|
Regulatory Capital Restrictions
|
Bitcoin holdings might not qualify to be accepted as part of
capital required by the regulator for various reasons (e.g. due to the fact
that Bitcoin does not have any recognized closing price on stock exchange which
allows to mark to market such holdings).
|
BTCE is a security and is traded on Deutsche Börse
(XETRA). It is much easier to qualify holdings of BTCE as regulatory
capital than holdings of Bitcoin.
|
Money Laundering Concerns
|
Bitcoin is
a relatively new asset class, and it is difficult (but not impossible) to
conduct due diligence and establish sources of funds. It is challenging for investors
willing to invest in Bitcoin to establish with the necessary certainty that the
Bitcoin they are buying is not proceeds of crime.
|
Only
Bitcoin screened with market leading chain analysis too makes it into BTCE
custody backing the issued instruments. BTCE is a fully fungible product (which
ensures superior liquidity), but investors wishing to create units of BTCE
in exchange for Bitcoin (instead of purchasing it on regulated exchange) have
either to be a regulated Authorised Participant (“AP”) themselves or have such
AP represent them as an agent. APs are licensed and regulated financial
intermediaries, and as such are under very strict anti-money-laundering
obligations. This means that investors buying BTCE securities can be
sure that any Bitcoin they are getting exposure to (and which they can receive
should they want to do so due to fungibility of the product) is clean.
|
Settlement & Post Trade Risk
|
Parties buying Bitcoin are exposed to counterparty (settlement)
and post-trade price risks. Your counterparty can go insolvent after receiving
the investor’s part of the settlement (e.g. A ‘Bitcoin exchange’ going out of
business while the investor has cash of Bitcoin deposit with it) or it may not
honour the favourable price of a trade. Delivery-versus-payment arrangements
for Bitcoin trades are not common, and central clearing of trades to eliminate
the price risk is virtually non-existent. This risk is particularly evident in
transactions involving frequent large volume Bitcoin settlements (e.g. lending
using cryptocurrency as a collateral or lending of cryptocurrency itself).
|
BTCE is a
security, which is eligible for central counterparty clearing by Eurex
Clearing. You can settle trades in BTCE using the
Delivery-versus-Payment mechanism of Clearstream system, which effectively
eliminates any counterparty risk. Investors can also use well-established
business-processes for securities lending or using BTCE as collateral in
order to facilitate, streamline and considerably de-risk any lending operations
involving Bitcoin.
|
Banking and Investment Platforms
|
Most banks and platforms lack the infrastructure
or desire to settle any money related to Bitcoin transactions.
|
BTCE is a security, and investors can expect
considerable ease with their banks when dealing with BTCE instead of the
underlying Bitcoin directly.
|
Summary:
In twelve short years, Bitcoin has
fundamentally altered the way we think about currencies and financial
institutions, governments and businesses have accepted it as more than just an
experiment. Bitcoin now facilitates real-world transactions every day and is
beginning to be accepted by retailers both online and offline for payments.
While no one can predict the future, Bitcoin has proved its utility and seems
likely to find more supporters and applications as the market further matures.
Now investors have the option to invest in Bitcoin, with the security of
trading it on a recognised securities exchange.
BTCetc Bitcoin Exchange Traded Crypto| 200 bps
|
EXCHANGE
|
BLOOMBERG CODE
|
WKN
|
ISIN
|
SEDOL
|
CURRENCY
|
XETRA
|
BTCE
|
A27Z30
|
DE000A27Z304
|
BMWSLR9
|
EUR
|