Exchange-Traded Products (ETPs) in the digital asset finance space share certain similarities with traditional funds, such as Crypto Funds, but also exhibit key differences that investors and asset managers need to recognize. For those accustomed to investing through crypto funds, understanding these nuances can highlight why actively managed ETPs often offer advantages over passive ETPs or fund structures. These distinctions, particularly in areas like liquidity, transparency, strategy flexibility, and risk management, can prove beneficial for investors seeking both active management and the accessibility of exchange-traded products.

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From Crypto Funds to Active ETPs: The Evolution of Active Management in Digital Assets Market

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From humble beginnings with Bitcoin’s first block mined on January 3, 2009, the journey of digital asset investing has been one of constant evolution. The first major step came in 2010 with Bitcoin’s debut on Mt. Gox, opening up the first liquid marketplace for cryptocurrency trading. This moment marked a pivotal shift, bringing digital assets into the public’s reach.

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The entry of institutional players followed in 2013, when Pantera Capital launched the first cryptocurrency fund in the U.S. with Bitcoin trading at just $65. This fund offered a new gateway for institutions to enter the digital asset space, expanding the market’s legitimacy.

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In 2015, the arrival of the CoinShares Bitcoin ETP was a game-changer, bringing Bitcoin to a regulated stock exchange for the first time. This milestone made digital assets more accessible, liquid, and secure for investors accustomed to traditional markets.

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Until 2020, investors seeking active management could only turn to Crypto Funds. However, the launch of the world’s first actively managed digital asset ETP (FiCAS Active Crypto ETP: BTCA) by FiCAS in July 2020 in Switzerland opened a new frontier for investors. This breakthrough made active management accessible within an ETP for the first time, offering a revolutionary combination of liquidity, transparency, and strategic flexibility, opening the doors to a much wider investor base.

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Active vs Passive Digital Asset ETPs and Crypto Funds: A Comparative Analysis

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Active Digital Assets ETPs combine the potential benefits of active management traditionally offered through Crypto funds with the liquidity and security of ETPs, established in recent years primarily through Passive Digital Asset ETPs in Europe, and just recently with Spot Bitcoin and Ethereum ETFs in the US.

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This table provides a comparison of active Digital Assets ETPs vs active Crypto funds, as well as to passive Digital Assets ETPs:

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Let’s take a closer look at the essential differentiatingaspects between actively managed Digital Asset ETPs, Crypto Funds, and passive Digital Asset ETPs. Each of these investment vehicles offers unique benefits, but understanding the nuances of management style, Liquidity, Transparency, and Accessibility is essential for investors seeking the best fit for their portfolios.

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1. The Importance of Active Management in Digital Asset ETPs vs Passive ETPs

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The rapid volatility of the digital asset market demands active management. As the market evolves quickly, assets that are relevant today could become obsolete by the next cycle, leaving passive portfolios exposed to significant risks. Active managers, with their ability to implement tactical strategies, are better positioned to capitalize on market inefficiencies and generate alpha. They can dynamically adjust portfolios to mitigate risks and seize new opportunities, something passive ETPs, which merely track underlying assets, cannot achieve. For individual investors or traditional portfolio managers, active management offers critical expertise and oversight in navigating this challenging market landscape.

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2. Liquidity Benefits of Active Digital Asset ETPs Compared to Crypto Funds

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Active Digital Asset ETPs provide unmatched liquidity, allowing investors to trade freely during market hours with no lock-up periods or penalties. Unlike Crypto Funds, which often require weeks to months for redemptions, ETPs give instant access to your assets, just like stocks. Backed by dedicated market makers, Active ETPs ensure continuous liquidity and transparent pricing, with hourly NAV tracking—a sharp contrast to Crypto Funds, which may update NAVs only monthly or quarterly. With no hidden fees and accessibility to both retail and institutional investors, Active ETPs offer a superior way to build an exposure with digital asset in a portfolio.

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3. Transparency, Security, and Regulation: Key Differences Between Active ETPs and Crypto Funds

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Active Digital Asset ETPs offer a level of transparency and security that Crypto Funds can’t match, thanks to progressive regulatory frameworks. Strong oversight from bodies like FINMA and SIX ensures that investors are protected through rigid audits, regular financial reporting, and compliance checks. This regulation helps prevent catastrophic events like asset crash (such as Terra Luna) or exchange failures like the FTX collapse in 2021 by clearly defining which exchanges, custodians, and assets are safe and eligible for ETPs. With these safeguards in place, active ETP investors benefit from a higher level of protection and trust, unlike those relying on loosely regulated Crypto Funds.

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4. Accessibility and Investor Reach: How Digital Asset ETPs Compare to Crypto Funds

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Active Digital Asset ETPs break down barriers, offering access to both retail and institutional investors, unlike Crypto Funds, which are limited to institutional players. Investors can easily buy ETPs through regulated banks and brokers, seamlessly managing digital assets alongside equities, bonds, and indices on the same platform. This accessibility makes ETPs far more inclusive and convenient.

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Moreover, thanks to European passporting rules, Digital Asset ETPs can be traded across multiple European markets, giving investors greater reach and flexibility. This cross-border accessibility is a significant advantage, making ETPs a more practical option compared to the more restricted Crypto Funds.

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The Future of Active Digital Asset ETPs

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While Active Digital Asset ETPs represent a significant innovation, merging the strengths of Crypto Funds and Passive ETPs, they are still in the early stages of development. As of Q1 2024, the total Crypto Fund AUM, according to the Coinbase 2024 Allocator’s Guide to Digital Asset Hedge Funds, remains below $50 billion—accounting for less than 2% of the traditional hedge fund industry’s AUM. Similarly, Passive ETPs in digital assets hold an estimated $11 billion in AUM. By contrast, Active ETPs are in their infancy, with AUM estimated between $50-100 million.

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The trajectory of Active ETPs reflects a broader trend in traditional finance. Historically, Exchange-Traded Products were associated with passive investing. However, since 2019, the share of actively managed ETFs in the U.S. market has surged—from just over 2% to 8.5% as of March 31, 2024 (Morningstar). This shift demonstrates the growing demand for active management within the ETP structure.

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Given the recent rise of Spot Bitcoin and Ethereum ETFs in the U.S.—a trend that began with passive ETPs in Europe in 2015—we can anticipate a similar growth trajectory for Active Digital Asset ETPs. As the market continues to mature, the need for active management will likely drive greater adoption of Active Digital asset ETPs, positioning them as a critical tool for navigating the future of digital asset investing.

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Currently, FiCAS and Bitcoin Capital are the only issuer and manager of Active Digital Asset ETPs, leading efforts to educate investors about this innovative solution and also aiming to onboard top-tier crypto asset managers into the Active ETP space, offering dynamic, actively managed strategies within a regulated and transparent framework.

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Disclaimer: This content is for educational and informational purposes only and does not constitute trading, legal, or investment advice. It is directed at our followers in Switzerland and may not represent the views of FiCAS. The author may hold assets mentioned in this article and assumes no obligation or responsibility for any actions taken based on the information provided.