ETP vs ETF: What is the difference?

What should you consider when choosing between ETP and ETF to invest in digital assets such as Bitcoin and Ethereum?

The world of finance can be a tricky place, full of similar-sounding terms and jargon that can confuse you. Just when you think you have something figured out, another acronym appears to add to the confusion.

Two of the most commonly confused terms are exchange-traded product (ETP) and exchange-traded fund (ETF). They may sound almost the same, but they play different roles in the investment arena.

Let’s explore the world of ETPs and ETFs, what sets them apart, and why they’re important to you as an investor.

What are ETPs?

Exchange-traded products, or ETPs, are a broad group of financial instruments that you can buy and sell on exchanges just like regular stocks. They are designed to track the value of different assets, including crypto, commodities, and indices.

One of the great things about ETPs is that they allow you to invest in specific markets or assets without actually owning them. For example, you can gain exposure to Bitcoin (BTC) without having to buy Bitcoin directly.

The most common ETP in crypto is the exchange-traded fund, which we’ll look at shortly. However, ETPs also include other types, such as exchange-traded notes (ETNs) and exchange-traded commodities (ETCs), and each comes with its own set of risks and benefits.

For example, a crypto ETN could track the price of Bitcoin or a broader digital asset index.

But remember, ETNs are essentially debt instruments, meaning they carry the creditworthiness risk of the issuer. If the issuing bank gets into financial trouble, the value of your ETN could fall.

On the other hand, ETCs are more similar to ETFs but focus on specific commodities or a group of them.

Unlike ETNs, ETCs are typically backed by real assets, which provides extra security because you have indirect exposure to the commodity without having to own it.

In Europe, you can find many crypto ETPs listed on major exchanges like SIX Swiss Exchange and Germany’s Deutsche Börse. These products give you exposure to assets ranging from Bitcoin and Ethereum (ETH) to lesser-known cryptocurrencies.

Additionally, these products are regulated and offer a level of security and trust that is often lacking in the crypto world.

What Are ETFs?

ETFs are a type of ETP, meaning they belong to a broader family of financial products that you can trade on an exchange.

Think of ETFs as a smaller group within the larger ETP category. Just as all squares are rectangles but not all rectangles are squares, all ETFs are ETPs but not all ETPs are ETFs.

Crypto ETFs have gained a lot of traction recently, especially after the launch of the first Bitcoin ETFs in the US in January 2024. These ETFs have made it easier for traditional investors to enter the crypto market through a regulated and familiar product.

For example, these spot Bitcoin ETFs allow you to invest directly in Bitcoin without purchasing Bitcoin, making it easier for traditional investors to enter the crypto space.

Recently, Ethereum ETFs have also entered the US market, offering similar exposure to Bitcoin ETFs.

Other countries around the world have also launched their own crypto ETFs, with Canada, for example, ahead of the game by offering Bitcoin and Ethereum ETFs since 2021.

Main differences between ETPs and ETFs Structure

ETPs
ETPs serve as an umbrella term for a variety of exchange-traded investment vehicles that track crypto assets. These include ETFs, ETNs, and ETCs. Some ETPs may even include a mix of crypto and blockchain-related stocks, giving you broader exposure to the crypto market.

ETFs
Crypto ETFs are a specific type of ETP that tracks the performance of a group of digital currencies or a single cryptocurrency. For example, a crypto ETF might hold a portfolio of top cryptocurrencies like Bitcoin and Ethereum, or it might focus on just one.

Risk exposure

ETPs
The risk in crypto ETPs varies depending on their structure. Some crypto ETPs, such as ETNs, may not actually hold the underlying digital assets but instead represent a debt obligation. This means their value is dependent not only on the crypto market but also on the creditworthiness of the issuer.

ETFs
Crypto ETFs tend to be less risky than other crypto ETPs because they typically hold actual cryptocurrencies in their portfolios. This means that the value of the ETF is directly tied to the digital assets it holds, rather than the financial health of the issuer. As a result, investors in crypto ETFs have more direct exposure to the price movements of the underlying cryptocurrencies.

Liquidity

ETPs
Liquidity in crypto ETPs can vary. Some ETPs, particularly those tracking lesser-known digital assets, may have lower trading volumes, which can lead to wider bid-ask spreads. This can make it more expensive for investors to buy and sell shares.

ETFs
Crypto ETFs, especially those that track major cryptocurrencies like Bitcoin or Ethereum, tend to be more liquid. High trading volumes make it easier for investors to buy and sell stocks without significantly affecting the market price. This liquidity is essential for those who want the flexibility to react quickly to changes in the fast-paced crypto market.

Regulatory oversight

ETPs
Crypto ETPs are subject to varying levels of regulatory oversight depending on their structure and the country they are offered in. Some ETPs, such as ETNs, may face different regulatory scrutiny compared to ETFs, which may impact transparency and investor protection.

ETFs
Crypto ETFs often come with tighter regulatory oversight, especially in markets like the U.S. Regulatory bodies like the SEC have specific rules that require higher levels of transparency and reporting for ETFs. For investors, this means that crypto ETFs are often safer and more reliable than other types of crypto ETPs.

Use cases: When to choose ETPs vs ETFs

When it comes to investing in the cryptocurrency market, both ETPs and ETFs offer unique advantages, but they serve different purposes depending on your investment goals and risk tolerance.

Knowing when it’s right to prefer an ETP to an ETF or vice versa can make a big difference in the performance of your portfolio.

Choosing ETPs

Because ETPs include a variety of products, such as ETNs and ETCs, they offer more flexibility in the types of assets you can invest in. For example, if you want to invest in a product that tracks a broader spectrum of the crypto market, including less popular digital assets or even a mix of cryptocurrencies and blockchain-related stocks, an ETP may be better suited to your needs.

ETF Selection

On the other hand, if you are looking for something simpler and generally safer, a crypto ETF may be the right path for you.

ETFs are known for their transparency, liquidity, and regulatory oversight, making them a popular choice for investors looking to directly invest in major cryptocurrencies like Bitcoin and Ethereum.

For example, if you want to invest in top cryptocurrencies but don’t want to deal with the complexity of holding multiple cryptocurrencies yourself, a crypto ETF offers a simple and effective way to do so.

Final thoughts

Ultimately, whether you choose an ETP or an ETF depends on your investment goals, risk tolerance, and the specific exposure you are seeking in the crypto world.

By learning the nuances of these products, you can better understand the complex world of crypto investments and make choices that fit your financial goals.