UK crypto ETNs see low trading volumes; retail access would be a 'game changer,' says 21Shares

UK crypto exchange-traded notes backed by bitcoin and ether have witnessed low trading volumes since they launched on the London Stock Exchange on May 28 following approval from the country’s financial regulator, the Financial Conduct Authority.

Unlike the U.S. exchange-traded funds, only professional investors are permitted to trade the products — and opening them up to the retail market would be a “game changer,” according to one of the issuers, 21Shares.

21Shares offers four bitcoin and four ether-backed cross-listed products in the UK. WisdomTree manages two Bitcoin BTC -0.52% and two Ethereum ETH -0.78% ETNs, and Invesco also offers two bitcoin-backed products. To be listed on the LSE, crypto ETNs must be physically backed, non-leveraged and offer exposure to only bitcoin or ether. 

Since launch, the total turnover for all the products combined amounts to just $504,880 as of June 6, with WisdomTree accounting for 59% of the trading volume and 21Shares 41%. The Invesco products have witnessed zero trading volume so far, according to data from 21Shares. For comparison, spot Bitcoin ETFs in the U.S. saw $2.5 billion worth of trading volume on Friday alone, according to The Block’s data dashboard.

WisdomTree’s four UK crypto products have seen comparative trading volumes so far. However, among 21Shares’ products, its Ethereum offerings have been more successful, accounting for 76% of its trading volumes. Within that, 21Shares’ Ethereum Staking ETPs have seen around 57% more trading volume than its Core Ethereum product without a staking yield.

In terms of average daily spread, 21Shares’ products maintain the tightest levels among the crypto ETNs on the LSE, according to the data provided. The spread refers to the average difference between the bid (buy) price and the ask (sell) price of an ETN over a trading day — an important metric regarding the cost of trading and the liquidity of the products on offer.

LSE is not the only trading venue

21Shares noted that professional traders will typically trade over-the-counter, buying and selling financial instruments directly with another party outside of formal exchanges like the LSE, or via the most liquid exchange available.

Though the FCA opening up the UK market to professional investors is a “huge step in the right direction,” as these are also cross-listed products, meaning the financial instruments are listed and traded on multiple exchanges across different countries or regions, the low trading volumes were “in line with expectations,” 21Shares UK Head Alex Pollak told The Block.

“Professional investors are going to trade on markets with the most liquidity — which as of now is Deutsche Börse Xetra," Pollak said. Xetra is the reference market for exchange trading in German shares and European ETPs. 21Shares first began launching crypto ETPs on Xetra in July 2020.

However, the FCA and LSE’s “stamp of approval” has meant that many Wealth and Private Banking platforms are now actively considering how they can either offer or add a bitcoin or ether allocations to professional client portfolios, Pollak added. “We do expect to see more trading volume once the platforms complete their onboarding process,” he said.

“We still believe the FCA approval for professional investors in the UK is a really important step for the asset class, and we look forward to the market opening up for retail at some future time — which will be more of the ‘game changer’ moment,” Pollak concluded.

Other crypto asset managers agree

“These cross listings saw little initial trading,” WisdomTree Head of Capital Markets Michael Delew said in a statement shared with The Block, adding that was not unexpected given the products are only available to professional and institutional investors.

“UK based institutional investors were already able to access physically backed crypto ETPs on other European exchanges and over the counter (OTC) markets where they have been available since 2019, and see healthy daily trading volumes,” Delew said.

However, echoing Pollak’s sentiment, Delew agreed the development represents a significant step forward in the legitimization and relevance of the asset class for UK investors, and FCA approval could result in greater institutional adoption over time, removing regulatory uncertainty and barriers.

“The accessibility of a public listing on a regulated market approved by the UK regulator, ease of trading, transparency, and institutional-grade crypto ETPs which are 100% physically backed are getting noticed by more and more investors looking to allocate,” Delew said.

“The figures are low for several reasons," James Butterfill, Head of Research at asset manager CoinShares, told The Block. “Firstly, the ticket sizes [minimum investment amounts] are high to ward off retail investors. Consequently, the UK listed products are missing a huge opportunity, but these are the rules set by the FCA, who believe retail isn't sophisticated enough to invest."

“Secondly, understanding amongst UK institutional investors is very low relative to the rest of Europe, for that reason, they have chosen not to invest or have already been able to invest in the larger, more liquid European ETPs,” Butterfill added.

CoinShares offers crypto exchange-traded products in Europe but not currently in the UK.

Regulatory landscape in the UK

The FCA has taken a cautious stance toward the crypto space in an attempt to ensure investor protection while trying to foster innovation. In 2021, the FCA banned the sale of derivatives and exchange-traded products to retail investors. However, the UK's stance on cryptocurrency regulation has subsequently been evolving.

Statements from the FCA in March first indicated a willingness not to block requests for crypto ETNs for professional investors. The London Stock Exchange then announced plans to begin accepting Bitcoin and Ethereum ETN applications in Q2, with crypto ETN trading commencing from May 28. These products offer exposure to bitcoin and ether's price movements, albeit through a slightly different financial structure than a direct ETF.

ETNs do not directly own the underlying assets they represent, unlike the U.S. spot Bitcoin ETFs. Instead, ETNs are debt securities issued by a financial institution that promise to pay the holder a return equivalent to the performance of an asset, minus fees and expenses.

Could Bitcoin ETFs come to the UK?

Currently, UK retail investors also face hurdles that prevent them from investing directly in U.S. spot Bitcoin ETFs. The primary challenge lies in the regulatory frameworks governing securities in both countries, which do not always align seamlessly for cross-border investments.

Coinbase UK CEO Daniel Seifert recently said that the availability of crypto ETNs is a positive step forward for the UK. When asked whether he would want to see Bitcoin ETFs available in the UK, Seifert replied, “I would say more choice for consumers is always good.”

Kraken's UK Managing Director Bivu Das is also among those optimistic about the potential for Bitcoin ETFs in the UK, emphasizing the importance of these financial products in providing regulated investment opportunities to a broader audience.

In March, Das explained that the world has changed significantly since such products were restricted in the UK in 2021. "The UK has always said it wants to be a crypto hub. And this is one of the basic fundamentals potentially for meeting that definition," he added.