Want to trade Crypto ETFs? Tough. You Can’t
Cryptocurrency-related investments have been getting a hard time recently from regulators on either side of the Atlantic.
However, the broking community can clearly still see value in the products.
US-owned FXCM is the latest broker to enter the space with the introduction of a basket of cryptocurrencies that investors can trade at the click of a mouse.
The basket that is specifically aimed at retail crypto traders is made up of five coins namely Bitcoin, Ripple, Litecoin, Bitcoin Cash and Ethereum.
How does this compare to cryptocurrency ETFs?
“Pre-packaged” basket such as these allow traders to gain exposure to a specific spread of investments with just one trade, thereby simplifying asset allocation and reducing trading expenses, when compared to multiple trades that might otherwise be required.
FXCM is not the first margin trading provider to enter this market indeed we looked at crypto indices offered by IG Group and CMC back in the summer
But FXCM has taken a slightly different approach by choosing to equally weight their new basket so as to minimise or reduce the influence that crypto heavyweight Bitcoin has on the value of the overall basket. At least in a mathematical context, stripping out the sentimental influence that Bitcoin has on crypto traders being another matter entirely.
In the absence of crypto ETFs, which look to be off the table for the foreseeable future, these type of baskets gives investors the chance to gain a certain amount diversified exposure to the alternative asset class.
How do you price this Crypto basket?
However, the pricing of the basket rests solely with the basket originator, who, when acting as a market maker, may make a price that suits their book, rather than always reflecting fair value. Though that’s an issue common to all instruments where there is only one price maker, not just specialist basket trades.
One might argue though that the benefits of trading the crypto basket as a CFD trade i.e. cash settlement and no custody issues, outweigh any concerns about the pricing of the underlying.
It’s also striking to us that this innovation has, to date, been aimed at retail traders and that as yet no one has come forward with an equivalent instrument aimed at institutional customers. Perhaps that says something about the liquidity and ease of dealing in the crypto basket constituents, but then again that’s exactly the reason why an institutional product would be of interest, particularly a listed one. Let’s see if anyone picks up that batton.