Crypto ETNs Listed on LSE Fail to Gather Inflows Due to Lack of Institutional Interest

Newly listed bitcoin and ethereum exchange-traded notes (ETNs) listed on the London Stock Exchange (LSE), are failing to attract inflows due to the lack of institutional demand, according to crypto ETP providers.

In May, 21Shares launched four new physically-backed crypto exchange-traded notes (ETNs) including the 21Shares Bitcoin ETN, 21Shares Ethereum Staking ETN, 21Shares Bitcoin Core ETN, and the 21Shares Ethereum Core ETN.

WisdomTree listed a Bitcoin and Ethereum ETN in May. Invesco launched the Invesco Physical Bitcoin ETP listed on the LSE earlier this week carrying a total expense ratio of 0.39%.

Crypto ETNs track the performance of underlying assets such as bitcoin or ether and are traded and settled like normal shares.

LSE Late to the Party

The new crypto products are restricted to professional investors only, under Financial Conduct Authority (FCA) regulations. Why have the products been slow to gain inflows since listing?

“Pretty simple really. The LSE is very late to the party,” HANetf co-founder and co-CEO Hector McNeil told CryptoNews. Comparing the lack of interest in LSE-listed ETNs and ETPs, McNeil highlights there is plenty of liquidity in markets like Xetra German Electronic Exchange.

The FCA does not allow retail consumers to invest in the products and placed a ban on the sale of crypto derivatives and ETNs in 2021.

“FCA retail ban means no local retail interest to underpin volumes either. Hopefully, it’s a foot in the door with the FCA and they change their approach to be more consistent with ‘complex ETPs’ like leverage ETPs where sophisticated retail can get access. If they did this it would create a deeper and healthy local market,” explains McNeil.

Lack of Institutional Demand

There are several potential reasons why crypto ETNs listed on the London Stock Exchange are not generating significant trading volumes, Laurent Kssis, an independent board member of Issuance Swiss AG and crypto ETP veteran told CryptoNews.

One factor is the lack of institutional demand, explains Kssis. Institutional investors, such as hedge funds, pension funds, and asset managers, are often considered the primary drivers of significant trading volumes in traditional financial markets.

“There may still be a lack of widespread UK institutional adoption and demand for crypto ETNs, which could limit trading activity,” said Kssis.

Regulatory Uncertainty Impacted Inflows

Another factor impacting inflows into the newly listed crypto ETNs is regulatory uncertainty.

“The regulatory landscape surrounding cryptocurrencies and crypto-related investment products can be complex and evolving. Regulatory uncertainties or concerns about potential changes in regulations may deter some investors from actively trading crypto ETNs, leading to lower liquidity and trading volumes,” said Kssis.

Then there is already a saturated European market when it comes to ETPs trading in Germany, Switzerland and France.

“Competition from existing EU — investors have already gained exposure to cryptocurrencies through other investment vehicles, such as spot trading, futures contracts, or directly holding the underlying digital assets,” said Kssis.

The availability of alternative investment products could be diverting trading activity away from the LSE-listed crypto ETNs with many ETPs already trading in Europe.

Another factor coming into play is that US Spot ETF dominance has taken a lot of capital from institutional investors in the first wave in Q1 with BlackRock taking lion’s share.

Market Maker Support for Crypto ETNs

Another factor coming into play is market maker support for the products. Flow Traders are the main market makers.

“Sufficient market maker support is crucial for ensuring liquidity and efficient trading in financial products. We currently have one market maker and a handful of authorised participants,” said Kssis.